2010-01-16: CNBC Editor Tries To Justify Wall Street Payouts
How long before the compensation-cranks come after YOUR salary? And mine? Nobody wants to cut a pro quarterback’s pay when he throws a passel of interceptions. Congress didn’t demand steep pay cuts for workers at the automakers when they lost billions and got a government bailout; laid-off workers got 98 percent of pay for two years, and the union refused to give that up until late into the crisis of late ’08.Kneale: The Real Numbers on Wall Street Pay - CNBC
Yet on Wall Street, bonuses fell 40 percent in 2008 as the world melted down. Thousands were laid off, lost most of their accumulated wealth, saw their stock holdings plummet in value and watched their options become worthless.
Isn’t that already punishment enough? Surely it cuts down on moral hazard: these guys lost so much of their own wealth they will shy away from crazy risk for years to come.
Dennis Kneale actually has some good ideas, but he buries them in his defense of Wall Street's pay excesses.
Simply put, Dennis, we all know that the companies that brought down our economy are not really well. What we've done is permit them to cover up their desperately weakened conditions in the hope that many of their contingent liabilities never have to be paid out. And, for those firms that got bailout funds (including but not limited to TARP funds), taxpayers provided and may be continuing to provide backup capital to protect them against further losses due to those liabilities.
It simply isn't possible to justify paying these bonuses when the industry as a whole is still on life support.
And that is before we face up to the weakness of the case for such bonuses at all. In theory, these are supposed to align the interests of executives with the interests of shareholders. And, in the case of many financial firms, the biggest bonuses are not paid to executives, but to the traders who conduct the business upon which company profits are earned. But the truth is, the best way to align interests is to:
- pay part of each person's compensation in common stock
- seek to pay out fairly high dividends upon each share, so that stock ownership isn't about gambling on share price appreciation, but is about sharing in the fortunes of a (hopefully) successful, well-run business
We already know, from the poor performance of corporate America over the past two to three decades, that bonuses don't work. We know that whenever performance craters, boards of directors move the goal posts, so that managers still "win". We know that management stops focusing on strong and sustainable business operated in cooperation with the employees that make it all happen, instead concentrating on short-term game-playing (such as mergers and restructuring), whenever their pay is partially based on stock price growth.
If you have had a real job, you certainly figured out that most of your upstream is useless. Whether you work for a consumer-focused company or one that deals primarily with other businesses, top managers generally have no clue about what the business does for its money. Bonus-giving rewards those who generally have no better success at their jobs than they would throwing the money down at the roulette tables in Las Vegas.
I urge you to go read the article, however, because he has some really good ideas, such as the clawbacks and direct shareholder approval of compensation packages. His ideas fail, however, whenever the majority of shareholders are institutions (e.g., mutual funds, insurance companies) or insiders (including lower-level employees, who may face retailiation if their votes were known).
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