Before I rip into this rant/reporting, let me assure you, I hate it when the AIGs of the world pay out big money in bonuses after taking a bailout...
But the pay restrictions added to the stimulus bill by Senator Chris Dodd? Those aren't the answer either. More from Fortune:
"When Senator Chris Dodd, (D-Connecticut) crammed what he dubbed "tough new limits" on "lavish Wall Street bonuses" into the stimulus package, he may have created a bigger problem for the economy than the one he was trying to solve. The reason? His plan inadvertently rewards nonperformance and will drive talented financiers away from the companies that need them most.
"There will be a flood of top performers leaving for positions that have no restrictions," says Richard Smith of the Sibson compensation consulting firm. The pay rules "will slow the only financial engine that can pull the economy out of this mess."
Senator Dodd tacked 11 pages of pay restrictions onto the stimulus bill at the last minute. (Dodd's office didn't return a call seeking comment.) The main reason they'll backfire is that they make pay for performance, otherwise known as bonuses, illegal beyond a modest allowance, yet they permit unlimited pay for nonperformance. An executive may be paid a guaranteed base salary of any size but may not receive a bonus exceeding one-third of total pay. And even that minor bonus cannot be based on profits; the rules prohibit any pay plan "that would encourage manipulation of the reported earnings" of the firm, which is of course what any plan based on profits would encourage. So paying top executives in any sensible way is forbidden.
Think of it this way: You want your kids to clean their room, but they know you're taking them to the movies regardless. You can still threaten not to buy them the giant box of Gummi Worms - but the decision must not be based on whether their room is clean. Will this plan work?"
Thanks Senator! I don't claim to have the answer to this mess, but instead of having to choose between the two polar opposites (the brutal high-risk, high-return wall street version, or the let's regulate it to death version of Chris Dodd), can someone please come up with an incentive pay plan that actually works to incent the right things?
For example, consider this Geoff Colvin example from the same Fortune article:
"Let's think this through: Imagine a guy running a foreign-exchange trading desk at Morgan Stanley (MS, Fortune 500) or Goldman Sachs (GS, Fortune 500). He has never been anywhere near toxic assets. Let's suppose he's good at his job and made $100 million for the firm last year - money that strengthens the firm and reduces its need for capital injections from taxpayers. And let's imagine the firm wants to pay him a $5 million bonus on top of a $500,000 base salary. Washington's message to him: You must be punished! We'll make sure you're not incentivized to perform as well this year. Thus, the best performers, those most eager to show their stuff and get paid for what they produce, will leave the firms that most need excellent performers. They'll go to companies that can pay people what they're worth."
My biggest issue with the pay plan above is that we don't really know what percentage of the 100M in profits is a true value add, and what would have happened regardless, by the same trading professsional taking orders via his spot in the marketplace. There's a certain amount of order-taking that a clerk could do in some of that number. What % of the 100M actually was a premium versus the same traders peers, both at Morgan Stanley and elsewhere?
I know it's tough to measure, but those firms, and others like them, need to figure it out. Or they can expect the Chris Dodd version for the remainder of their firm's existence, which the market tells us probably won't be long if they're constrained from valuing talent in the same way as their non-TARP competitors.
I was a commission sales person for 15 years; I made a lot of money because I was good at what I did. I do agree with not giving bonuses for non performance BUT, this is just the start. I just wish ONE of these spineless executives would get up and tell Barney Frank, who’s boy friend made Hundreds of Thousands of dollars in bonuses at Fannie Mae, to GO TO HELL and KEEP OUT OF OUR POCKETS.
The funny thing is that all the papers are expounding on the fact that "the Congress's ratings have doubled" yeah to 32%! So what do they do? GIVE THEMSELVES A RAISE! Pay for performance is GONE. Obviously, they are not performing very well and we still pay them. Dodd is a slime ball but who re-elected him? I am sorry but we get what we deserve. I have one more reference to hypocrisy, Nancy Pelosi telling the corporate executives they could not have Jets and then getting on the JET WE PAY FOR to go to Italy!
Posted by: Dmorris | March 20, 2009 at 08:04 AM