I believe I am permitted to hyperventilate only once in an evening, so I’ll have to act with a modicum of restraint here.
The Obama executive compensation restrictions for bailout fund recipients have been leaked, and may be long enough on appearances to appease an angry US electorate.
But the shortcomings of the supposedly tough plan, with a pay cap of $500,000 (plus stock dividends, if any) are many, even though some executive comp
stooges experts dutifully declaimed how truly awful and unreasonable it was:
“That is pretty draconian — $500,000 is not a lot of money, particularly if there is no bonus,” said James F. Reda, founder and managing director of James F. Reda & Associates, a compensation consulting firm. “And you know these companies that are in trouble are not going to pay much of an annual dividend.”
Mr. Reda said only a handful of big companies pay chief executives and other senior executives $500,000 or less in total compensation. He said such limits will make it hard for the companies to recruit and keep executives, most of whom could earn more money at other firms.
“It would be really tough to get people to staff” companies that are forced to impose these limits, he said. “I don’t think this will work.”
A sense of entitlement is most certainly entrenched. When Lee Iacocca groveled (and he had to grovel) to get a bailout of Chrysler (which was a loan and the deal in the end was profitable to Uncle Sam) he offered to take a $1 salary. I am pretty sure his top team did not take that little, but I would be stunned if they did not rein in they take considerably.
But before we get too far ahead of ourselves, here are the key measures,although reading the Wall Street Journal, the New York Times, and Bloomberg, there is not a convergence of detail, and some plan elements may not yet be finalized:
1. Pay cap of $500,000, apparently for “top executives” (presumably the usual suspects, the five listed in the proxy) excluding dividends on stock. Any other pay will be in the form of restricted stock that will not vest until taxpayers have recouped their commitment
2. Other restrictions on the top 50 (bonus pools to shrink 40% from 2007 levels)
3. No severance pay for CEOs at firms receiving “exceptional” assistance
4. Limits on corporate jets, office renovations and holiday parties
Let’s look at what this does not address:
1. It appears no attempt to take measures relative to the funds committed. We said loud and clear that we didn’t see a way to claw back payments already made (although one reader suggested barring them from working in any licensed financial institution unless they disgorged some of the dough). However, if I read the plan correctly, the restrictions will be imposed ONLY on those receiving NEW dough. Huh? I can see not imposing this retroactively (that would be a stretch, but I’d be curious if anyone had a legal theory and mechanism by which that could work) but how can AIG and Citi, the two biggest black holes, not be subject to the rules going forward based on what they have taken down to date?
2. Further pay restrictions, but limited to the top 50. Ahem, in most big banks, there were a hell of a lot more than 50 people making well over a million. The number is nowhere near large enough. And I suspect it will lack restrictions on related entities (just wait for a bank to spin a pet group out but still retain a considerable economic interest and provide funding and/or office space).
How clearly “substantial assistance” is defined will also be telling.
Amusingly, they arrived at $500,000, which was my back of the envelope MD pay in bad market, adjusted for inflation, estimate.
Another tidbit per the Wall Street Journal:
Mr. Obama is expected to announce mandatory “say on pay” requirements, which would give shareholders a vote on executive compensation, long an item on the wish-list of shareholder activists. Mr. Obama introduced legislation to give shareholders a say when he was a senator, though the bill didn’t become law.
The big failing, aside from not going deep enough into these firms, that it addresses the level, not the structure, of pay. Yes, the banks appear to need to be reined in forcibly. Amazing cheek, and their utter lack of sense and propriety brought it upon them, although I see plenty of room to play games were anyone so keen to do so (the real check is leaks from disgruntled employees, but even then, by the time the word gets out, as with the 2008 bonuses, the checks have cleared and the damage is done).
But there is no effort to root out the real cancer: asymmetrical incentives, namely, bonuses based on single year performance, when the risk of actions taken often extends into the future. As we have seen, without the check of private ownership, you get undue risk taking and massive blowups (amazing, isn’t it, that this system worked just fine when the money of the people issuing the bonuses was at stake?) So if the industry ever recovers, we can look forward to a repeat of this cycle, although perhaps at lower amplitude.