Even with restrictions proposed by world leaders, banker compensation is unlikely to fall.

By Ian Katz
Bloomberg Markets, December 2009

Global leaders and regulators trying to rein in banker pay are proposing everything from clamping down on guaranteed bonuses to recouping compensation from prior years if losses mount. Largely unaddressed is the topic that stirs the most public ire: How much money is too much?

The guidelines endorsed by U.S. President Barack Obama and the rest of the Group of 20 nations aim to discourage excessive risk taking by employees in the financial industry. Corporate governance and compensation experts say new rules will help eliminate plans like those that tied bonuses to the number of subprime mortgage bonds created, for example, or rewarded trades that later turned sour.

Mark Poerio, a lawyer who tracks compensation issues at Paul, Hastings, Janofsky & Walker in Washington, says the proposed rules for banker bonuses will better link rewards with behavior that creates long-term success and stability. The restrictions won’t cut pay overall, says Poerio, who advises financial companies. “I would be shocked to see reductions,” he says.

Only at seven companies that received extraordinary bailouts are paychecks being trimmed by the government, and just two of those are large banks. Kenneth Feinberg, Obama’s special master on compensation, is ordering that salaries be cut by an average of 90 percent and total compensation, with bonuses, be slashed by an average of 50 percent for 25 top executives at these companies. Bank of America Corp., Citigroup Inc. and insurer American International Group Inc. are among those under Feinberg’s oversight.

Feinberg’s Model

Feinberg says his pay reductions should serve as a model for the rest of Wall Street. Poerio says banks such as Goldman Sachs Group Inc. that repaid the government loans they got at the height of the financial crisis are unlikely to follow Feinberg’s lead and cut pay.

Creating proper incentives in pay plans is what regulators and legislators should focus on, says former Representative Michael Oxley, co-sponsor with Senator Paul Sarbanes of the 2002 law that made management and corporate boards more accountable after the frauds committed at Enron Corp. and WorldCom Inc. “They need to get that right,” Oxley says. “It’s not as sexy to the public but certainly a lot more workable.”

Bonuses paid to securities industry employees in New York City peaked at $34.1 billion in 2006, according to New York State Comptroller Thomas DiNapoli. The total was $18.4 billion in 2008 even as banks’ losses and their excessive leverage caused governments worldwide to bail them out. Alan Johnson, a compensation consultant in New York, expects Wall Street pay for 2009 to jump 40 percent to about $26 billion.

Bonuses are getting a boost from rising profit at the banks that came through the credit crisis in the best condition. Goldman Sachs is on a pace to almost match the record $20.1 billion in compensation paid to its employees worldwide in 2007. Goldman isn’t shy about paying for performance, says Jeanne Branthover, a managing director at Boyden Global Executive Search Ltd. “They’re taking the lead as far as, ‘We believe in our people; we’ve done well; we’re going to stay the way we’ve always been and not change,’” Branthover says.

‘Irresponsibility’

DiNapoli’s next report on financial industry bonuses may stir new complaints. In January, a day after the release of the 2008 pay data, Obama called the payment of hefty banker bonuses during a recession the “height of irresponsibility.” Senate Banking Committee Chairman Christopher Dodd said at the time that he would try to force executives to repay bonuses.

Still, aside from Feinberg’s plan, other efforts to address banker pay are more in line with G-20 guidelines. The Federal Reserve said on Oct. 22 that it will review practices at the 28 largest bank holding companies it regulates to ensure that pay packages don’t encourage risky investments.

The five biggest banks in the U.K., including Barclays Plc and Royal Bank of Scotland Group Plc, which is majority owned by the government, agreed to follow the G-20 principles after meeting with Chancellor of the Exchequer Alistair Darling in late September.

John Gutfreund, former chairman of Salomon Brothers Inc., says the pay restrictions being adopted fall short of what’s needed. “The same excesses that took place before appear to be perfectly well in place,” he says. “It’s too laissez-faire.” Checks on risk taking that were in place until the late 1990s were more sweeping and effective, he says.

Overpaid Baseball Players

Oxley, meanwhile, is pleased that the guidelines for most banks stop short of capping pay. “I think the Yankees are overpaid, too,” he says, referring to the New York team with the highest payroll in Major League Baseball. “But I don’t want to pass a law saying how much Derek Jeter can make playing shortstop.” Banks outside Feinberg’s reach are mostly changing policies in ways that fit the G-20 approach. New York-based Goldman Sachs is paying a larger share of compensation in stock, with restrictions on when the shares can be sold. Zurich-based Credit Suisse Group AG said on Oct. 20 that it would increase salaries for senior employees as a percentage of total pay. The plan also provides for bonuses to be deferred for upto four years and tied to company performance.

The debate over banker pay is pushing companies in the right direction, says Robert Profusek, a partner at law firm Jones Day in New York. Profusek, who advises on compensation issues, says capping pay is the wrong approach. The government-mandated cuts at Bank of America and Citigroup, meant to counter public outrage over the cost of the bank bailouts, may prompt talented bankers to leave, Profusek says. “We will be cutting off the taxpayers’ noses to spite their faces,” he says.

With assistance from Christine Harper in New York. Ian Katz covers financial regulation for Bloomberg News in Washington at ikatz2@bloomberg.net

		Email this article Printer friendly format

		Send a letter to the editor