Click amount to donate direct to CounterPunch
  • $25
  • $50
  • $100
  • $500
  • $other
  • use PayPal
DOUBLE YOUR DONATION!
We don’t run corporate ads. We don’t shake our readers down for money every month or every quarter like some other sites out there. We provide our site for free to all, but the bandwidth we pay to do so doesn’t come cheap. A generous donor is matching all donations of $100 or more! So please donate now to double your punch!
FacebookTwitterGoogle+RedditEmail

Getting Wall Street Pay Reform Right

There’s mounting talk on Capitol Hill that a Wall Street bailout will include some limits on executive compensation, as well as contradictory reports about whether a deal on controlling executive pay has already been reached.

Four days ago, such a move seemed very unlikely. But the pushback from Congress — from both Democrats and Republicans — has been surprisingly robust, thanks in considerable part to a surge of outrage from the public.

Will restrictions on CEO pay just be a symbolic retribution, as some have charged?

The answer is, it depends.

Meaningful limits not just on CEO pay, but also on the Wall Street bonus culture, could significantly affect the way the financial sector does business. Some CEO pay proposals, by contrast, would extract a pound of flesh from some executives but have little impact on incentive structures.

There are at least five reasons why it is important to address executive compensation as part of the bailout legislation.

First, there should be some penalty for executives who led their companies — and the global financial system — to the brink of ruin. You shouldn’t be rewarded for failure. And while reducing pay packages to seven digits may feel really nasty given Wall Street’s culture of preposterous excess, in the real world, a couple million bucks is still a lot of money to make in a year.

Second, if the public is going to subsidize Wall Street to the tune of hundreds of billions of dollars, the point is to keep the financial system going — not to keep Wall Street going the way it was. Funneling public funds for exorbitant executive compensation would be a criminal appropriation of public funds.

Third, the Wall Street salary structure has helped set the standard for CEO pay across the economy, and helped establish a culture where executives consider outlandish pay packages the norm. This culture, in turn, has contributed to staggering wealth and income inequality, at great cost to the nation. We need, it might be said, an end to the culture of hyper-wealth.

Fourth, as Dean Baker of the Center for Economic and Policy Research says, the bailout package must be, to some extent, “punitive.” If the financial firms and their executives do not have to give something up for the bailout, then there’s no disincentive to engage in unreasonably risky behavior in the future. This is what is meant by “moral hazard.”

If Wall Street says the financial system is on the brink of collapse, and the government must step in with what may be the biggest taxpayer bailout in history, says Baker, then Wall Street leaders have to show they mean it. If they are not willing to cut their pay for a few years to a couple of million dollars an annum, how serious do they really think the problem is?

Finally, and most importantly, financial sector compensation systems need to be changed so they don’t incentivize risky, short-term behavior.

There are two ways to think about how the financial sector let itself develop such a huge exposure to a transparently bubble housing market. One is that the financial wizards actually believed all the hype they were spreading. They believed new financial instruments eliminated risk, or spread it so effectively that downside risks were minimal; and they believed the idea that something had fundamentally changed in the housing market, and skyrocketing home prices would never return to earth.

Another way to think about it is: Wall Street players knew they were speculating in a bubble economy. But the riches to be made while the bubble was growing were extraordinary. No one could know for sure when the bubble would pop. And Wall Street bonuses are paid on a yearly basis. If your firm does well, and you did well for the firm, you get an extravagant bonus. This is not an extra few thousand dollars to buy fancy Christmas gifts. Wall Street bonuses can be 10 or 20 times base salary, and commonly represent as much as four fifths of employees’ pay. In this context, it makes sense to take huge risks. The payoffs from benefiting from a bubble are dramatic, and there’s no reward for staying out.

Both of these explanations may be true to some degree, but the compensation incentives explanation is almost certainly a significant part of the story.

Different ideas about how to limit executive pay would address the multiple rationales for compensation reforms to varying degrees.

A two-year cap on executive salaries would help achieve the first four objectives, but by itself wouldn’t get to the crucial issue of incentives.

One idea in particular to be wary of is “say on pay” proposals, which would afford shareholders the right to a non-binding vote on CEO pay compensation packages. These proposals would go some way to address the disconnect between executive and shareholder interests, reducing the ability of top executives to rely on crony boards of directors and conflicted compensation consultants to implement outrageous pay packages. But while they might increase executive accountability to shareholders, they wouldn’t direct executives away from market-driven short-term decision making. Shareholders tend to be forgiving of outlandish salaries so long as they are making money, too, and — worse — they actually tend to have more of a short-term mentality than the executives. So “say on pay” is not a good way to address the multiple executive compensation-related goals that should be met in the bailout legislation.

The ideal provisions on executive compensation would set tough limits on top pay, but would also insist on long-term changes in the bonus culture for executives and traders. Not only should bonuses be more modest, they should be linked to long-term, not year-long, performance. That would completely change the incentive to knowingly participate in a financial bubble (or, more generously, take on excessive risk), because you would know that the eventual popping of the bubble would wipe out your bonus.

Four days ago, forcing Wall Street to change its incentive structure seemed pie in the sky. Today, thanks to the public uproar, it seems eminently achievable — if Members of Congress seize the opportunity.

ROBERT WEISSMAN is editor of the Washington, D.C.-based Multinational Monitor, and director of Essential Action.

 

Your Ad Here
 

 

 

 

More articles by:

ROBERT WEISSMAN is president of Public Citizen.

October 22, 2018
Michelle Renee Matisons
Hurricane War Zone Further Immiserates Florida Panhandle, Panama City
Tom Gill
A Storm is Brewing in Europe: Italy and Its Public Finances Are at the Center of It
Christopher Brauchli
The Liars’ Bench
Gary Leupp
Will Trump Split the World by Endorsing a Bold-Faced Lie?
Michael Howard
The New York Times’ Animal Cruelty Fetish
Alice Slater
Time Out for Nukes!
Geoff Dutton
Yes, Virginia, There are Conspiracies—I Think
Daniel Warner
Davos in the Desert: To Attend or Not, That is Not the Question
Priti Gulati Cox – Stan Cox
Mothers of Exiles: For Many, the Child-Separation Ordeal May Never End
Manuel E. Yepe
Pence v. China: Cold War 2.0 May Have Just Begun
Raouf Halaby
Of Pith Helmets and Sartorial Colonialism
Dan Carey
Aspirational Goals  
Wim Laven
Intentional or Incompetence—Voter Suppression Where We Live
Weekend Edition
October 19, 2018
Friday - Sunday
Jason Hirthler
The Pieties of the Liberal Class
Jeffrey St. Clair
A Day in My Life at CounterPunch
Paul Street
“Male Energy,” Authoritarian Whiteness and Creeping Fascism in the Age of Trump
Nick Pemberton
Reflections on Chomsky’s Voting Strategy: Why The Democratic Party Can’t Be Saved
John Davis
The Last History of the United States
Yigal Bronner
The Road to Khan al-Akhmar
Robert Hunziker
The Negan Syndrome
Andrew Levine
Democrats Ahead: Progressives Beware
Rannie Amiri
There is No “Proxy War” in Yemen
David Rosen
America’s Lost Souls: the 21st Century Lumpen-Proletariat?
Joseph Natoli
The Age of Misrepresentations
Ron Jacobs
History Is Not Kind
John Laforge
White House Radiation: Weakened Regulations Would Save Industry Billions
Ramzy Baroud
The UN ‘Sheriff’: Nikki Haley Elevated Israel, Damaged US Standing
Robert Fantina
Trump, Human Rights and the Middle East
Anthony Pahnke – Jim Goodman
NAFTA 2.0 Will Help Corporations More Than Farmers
Jill Richardson
Identity Crisis: Elizabeth Warren’s Claims Cherokee Heritage
Sam Husseini
The Most Strategic Midterm Race: Elder Challenges Hoyer
Maria Foscarinis – John Tharp
The Criminalization of Homelessness
Robert Fisk
The Story of the Armenian Legion: a Dark Tale of Anger and Revenge
Jacques R. Pauwels
Dinner With Marx in the House of the Swan
Dave Lindorff
US ‘Outrage’ over Slaying of US Residents Depends on the Nation Responsible
Ricardo Vaz
How Many Yemenis is a DC Pundit Worth?
Elliot Sperber
Build More Gardens, Phase out Cars
Chris Gilbert
In the Wake of Nepal’s Incomplete Revolution: Dispatch by a Far-Flung Bolivarian 
Muhammad Othman
Let Us Bray
Gerry Brown
Are Chinese Municipal $6 Trillion (40 Trillion Yuan) Hidden Debts Posing Titanic Risks?
Rev. William Alberts
Judge Kavanaugh’s Defenders Doth Protest Too Much
Ralph Nader
Unmasking Phony Values Campaigns by the Corporatists
Victor Grossman
A Big Rally and a Bavarian Vote
James Bovard
Groped at the Airport: Congress Must End TSA’s Sexual Assaults on Women
Jeff Roby
Florida After Hurricane Michael: the Sad State of the Unheeded Planner
FacebookTwitterGoogle+RedditEmail