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October 24, 2009
Professor: Wall Street pay not a problem. Hunh?
Sunday's Washington Post will feature a column 5 myths about Wall Street pay days by Professor Roy Smith. Key line: Myth #1: The Wall Street bonus culture led to the financial crisis. There is absolutely no evidence to support this. Well, that is certainly a contrarian view; we and others emphatically reject it. The prevailing view, which we subscribe to, is that Wall Street pay socializes risk and privatizes reward in a "heads I win, tails I also win, but you lose" game that played a critical role in the collapse; that pay and bonus structures are wrongly based on short-term rewards, not long-term performance; and that board compensation committees have violated their fiduciary duties to shareholders by rubber-stamping every executive's bonuses, at every firm, regardless of performance, as if they were all from Lake Wobegon, "where all the women are strong, all the men are good-looking, and all the children are above average." For some others' views, mostly since Goldman's record bonuses, the Fed incentives rules and the Obama pay czar's proposal were announced in the last few weeks, here's a start: Fed chief Ben Bernanke: "Compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability." Fed's new pay and bonus proposal. Elizabeth Warren "“speechless” over the record bonuses being handed out by Wall Street firms." Warren Buffett: "Wall Street pay needs a "downside" when profits deteriorate because of reckless bets."U.S. Senator Chuck Grassley (R-IA) "These guys ought to come to Main Street, Iowa, and see how the real world lives." Pay czar Kenneth Feinberg on his proposed new limits for pay at the TARP banks in the LATimes: "The taxpayers are in deep with these seven companies," he said, "and one of my primary obligations is to see to it that the taxpayers' dollars are returned to the U.S. Treasury." AFL-CIO blog quoting its pension and corporate governance expert Dan Pedrotty: "Feinberg has created a model for how corporations should address compensation. Rather than larding CEOs with cash, their compensation is tied now with restricted stocks. That is, if the company does well, so does the CEO. That’s called “incentive.”"
And as Americans for Financial Security points out, the notion that these are completely publicly-accountable firms already is false. Shareholders need greater rights, including a "say on pay:"
See page 37 of our comprehensive AFR financial markets reform platform: Corporate compensation policies that encourage short-term risk-taking at the expense of long-term corporate health and reward managers regardless of corporate performance have contributed to our current economic crisis. Shareholders should have the opportunity to vote for or against senior executive compensation packages in order to ensure managers have an interest in longterm growth and in helping build real economic prosperity. So-called shareholder “say on pay” is established practice in the United Kingdom, and currently is in place at 74 publicly traded corporations in the United States. “Say on pay” proposals were introduced at over 90 companies in 2008 and received an average support of over 40 percent, receiving majority support at 11 out of 74 annual meetings, as of Nov. 12, 2008. Say on pay legislation was introduced in the 110th Congress by President Osama when he was a Senator from Illinois. Now is the time for the 111th Congress to reconsider say on pay legislation and include it as part of needed reforms to encourage executive accountability.
Posted by Ed Mierzwinski at October 24, 2009 06:52 AM
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