New comp rules brewing

Posted by Marc Hodak on May 23, 2009 under Executive compensation, Politics, Reporting on pay | Be the First to Comment

According to this story in Bloomberg:

Treasury Secretary Timothy Geithner called for an overhaul of compensation practices at financial companies and said the Obama administration’s plan to help realign pay with performance will be rolled out by mid-June.

“I don’t think we can go back to the way it was,” Geithner said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” to be aired tonight and over the weekend. “We’re going to need to see very, very substantial change.”

Geithner is not too clear what he means by “the way it was” in compensation practices that begs for “very, very substantial change,” so let me clarify.

1)  Let’s say you work in a bank that has seven divisions.  One particularly leveraged division, not the one you work in, totally screws up pushing the whole bank into a loss.  Your division made money.  In fact, it made enough to keep the whole bank from going under.  In Geithner’s view, echoing the view of the rest of the government and the media, you should get no bonus.

2)  Let’s say you work for a company that the government has more or less taken over.  You have a contract with the company for your services, a contract the government in essence approved, dictating compensation to be paid later (bonus, retention payment, deferred comp, whatever).  The media hates you and embarrasses the politicians.  In Geithner’s view, you should get none of the promised payment.

In other words, given the mob’s inability to distinguish behavior and results within institutions, once those institutions become unpopular, the mob’s sensibilities of what other people should be paid should be made the law of the land.  The mob is similarly blind to the difference among firms in an unpopular industry, as if there were no difference between Goldman and Lehman, or between JP Morgan Chase and Citi, in their need or willingness to take bailout money.

The hypocrisy doesn’t stop there:

[Geithner] said that Wall Street’s pay practices encouraged taking on short-term risk, and helped precipitate the financial crisis. What’s needed is a set of broad standards that federal regulators can use to make sure that doesn’t happen again, he said.

If we exchange “Wall Street’s pay practices” with “Congressional policies” we get a far more accurate sense about what precipitated the crisis.