The bureaucrat’s edge

Posted by Marc Hodak on October 22, 2009 under Collectivist instinct, Executive compensation | 3 Comments to Read

OK, incentives at banks have been deficient.  I’ve seen them all:  bonuses based on loan volume; banking fees based on a percentage of the debt issued; traders being richly rewarded for unsustainable performance shortly before getting fired.  So, granted that such incentives can motivate counterproductive behavior, how does it follow that having every major bank in the country submit their incentive plans to Fed review makes sense?

What is some Fed governor who, by law, can have no personal stake in the welfare of any particular bank going to see that the CEO or directors of those banks are going to miss?  Some 29-year old with a check list in the bowels of the federal government will be looking over incentive plans that took a CEO, Chief HR officer, and General Counsel many hours of review after several months of design and implementation, with all the lessons learned from the recent debacle, and that bureaucrat will send them an opinion saying, “I don’t think this plan is good for your firm or the economy.”  And these people, the ones who were good enough to survive the crash, with years of experience in their particular bank, and with a significant portion of their personal wealth tied up in their firm, these people are to expect to gain some insight from this GS-11 examiner, supervised by people who have never in their lives created and market-tested executive compensation plans?

Apparently, the people drafting these rules sincerely believe that Fed bureaucrats are going to give these major banks that edge.  And people apparently believe that the Fed will offer its opinions completely absent any political interference.

I’m not saying it couldn’t happen.  I’m just wondering who out there believes that it is worth having every major bank submit their incentive plans to prior judgment by federal officials.  Especially when there is zero evidence that incentive plans actually contributed to the financial crisis, and plenty of evidence that the Fed did contribute to it.