Banker Pay: Salmon vs. Barnett

I just had this IM exchange with Megan Barnett:

Felix Salmon: Hi Megan, I see you're attacking the cap on bankers' pay, while I think it's a good idea.

Megan Barnett: Yes, it's true. We finally disagree on something.

Felix Salmon: I suspect that at heart we disagree on the degree to which "smart executives" who can command multi-million-dollar pay packages are really the solution to the current problem
Would you at least agree though that they're clearly a large part of the cause of the current problem?
My feeling is that there's an unspoken assumption in a lot of the rhetoric surrounding this issue that there's some kind of efficient market in bankers: that if someone is being paid millions of dollars, that must be because he's particularly able. Hasn't this crisis pretty much destroyed that hypothesis?

Megan Barnett: I do agree that there are plenty of top execs with multi-million dollar packages that were a large part of the cause, yes. But I don't think that every bank executive who made more than a half-million was to blame. And I don't think that capping pay will necessarily attract better leaders.

Felix Salmon: But what makes you think it will attract worse leaders?
At the very least it will attract less greedy leaders, and that's a good thing, no?

Megan Barnett: Greed is all relative. These are people who are trained to make money for their businesses and they've spent their careers doing so. True, that got out of hand here, as it has in the past and will again in the future. To me, it's not about whether or not less greedy=better. It's about the fact that this is the wrong solution to the problem. It's off point, misguided, and little more than a PR maneuver for the populist masses. It's not going to fix what's broken now.

Felix Salmon: The system of annual bonuses was the best way yet devised of incentivizing top managers to push as much risk as possible into the tails. The way to get rich in banking isn't simply "to make money for your business", it's to come up with a strategy which outperforms everybody else, usually because the risks are hidden and there's a chance of it blowing up spectacularly. In fact, there's a case to be made that Bob Rubin's entire private-sector career followed exactly that path.
Fixing the compensation structure on Wall Street is an absolutely necessary part of the solution.
And PR maneuvers do actually serve a function, insofar as they send a message that the government expects to see serious and meaningful change.
Oh, one other point: 50% of Wall Street revenues go to compensation. This isn't off-point, this is very much the point.

Megan Barnett: But this plan doesn't fix the structure at all. There is no reason why Bank of America can't still reward a certain trading desk with six-figure bonuses. This applies to the top execs. I think this banking crisis should change the bonus structure overall going forward, but I don't think it's something the government should be forcing. I'm not arguing that Wall St compensation isn't too high, I think it is. I just don't think that Obama limiting the pay to top execs is the answer.

Felix Salmon: Right, Obama isn't trying to solve all the problems of the banking system at a stroke. But he is sending an important message to bank CEOs about the new world which they're living in. And he is protecting taxpayer dollars from being spent on multi-million-dollar executive compensation packages, which is just about the worst form of fiscal spending imaginable.

Megan Barnett: And do you think this will deter banks from seeking help if they need it?

Felix Salmon: The FDIC is already crawling all over every bank in the country. If the FDIC determines that a bank is insolvent, then it's going to have to accept government intervention whether it wants it or not. Participation is not voluntary.

Megan Barnett: So, let them run themselves into the ground first. I can't imagine a Wall Street where the motivation isn't the money you make. I don't think that having academics running the banking system will yield any better results for Americans.

Felix Salmon: The really good CEOs are going to be OK with this. They know that if they do a good job, they will have risen to a great challenge and made the world a better place: they're not driven purely by avarice. Or rather, insofar as they have been driven purely by avarice, that's been a large part of the problem. So let's see what happens when we get lower-paid CEOs. There's a good chance that they'll be better than their predecessors, and there's no real evidence that they'll be worse. (Can they be worse?) Most likely, of course, management won't change at all, and we'll have the same multimillionaires running the banks, just on a lower salary.

Megan Barnett: We shall see. Thanks for the chat, Felix. I'm off to lunch.

Felix Salmon: Pork?

Megan Barnett: Ha! No, not today.

Felix Salmon: Maybe tomorrow.

Comments

[JohnL:]

Felix,

I agree with you: once the banks start tapping the taxpayer for funds, we become owners of the firms. Owners offer pay packages for their workers. The bankers are always free to seek other opportunities.

Feb 04 03:46 PM

[suttoda:]

This is the most rediculous thing I have read. Capping executive pay is a grandstand move that will not accomplish anything. This is pure socialism. Why don't we just pay everyone the same. Then all the really good people will work just knowing they are making the world a better place. And the really good fairies will bring us energy, and all of the nations will play fair... Gimme a break!

Feb 04 04:29 PM

[3 degrees o...:]

The tax payers are "mad as hell" and do not want to spend any more money bailing out the banks and highly compensated bankers. Obama & the politicians know this and are using this salary cap as a way to get the taxpayer to go along with the bailouts. It makes no difference whether Felix or Mehgan are right. In fact you both miss the point, the tax payers do not think the banks are worth saving no matter the compensation level of their executives. The taxpayers are saying let the banks shareholders and bondholders take the hit, let these banks fail!

Feb 04 04:36 PM

[Larrysyr:]

Felix,

I agree with you on this one. I think even $500,000.00 is too high. I even think $1.00 is too much. Let a B-School intern run these banks. I don't see the results being any worse.

Come to think of it, could the results be any worse?

Feb 04 04:58 PM

[DW:]

Have to agree with Megan on just about everything she said.

Feb 04 05:06 PM

[JohnL:]

I agree with your sentiment 100%! Socialism will destroy this country. However, the problem is not that the new owners are setting the pay scale - the problem is that the government should never have become an owner of these firms in the first place.


On Feb 04 04:29 PM suttoda wrote:

> This is the most rediculous thing I have read. Capping executive
> pay is a grandstand move that will not accomplish anything. This
> is pure socialism. Why don't we just pay everyone the same. Then
> all the really good people will work just knowing they are making
> the world a better place. And the really good fairies will bring
> us energy, and all of the nations will play fair... Gimme a break!

Feb 04 05:08 PM

[tom q l:]

Executives are not going to have their direct reports making more than they are. By caping compensation at the executive level, you are setting the pay structure for the rest of the company. That is good!

Bonus are reward for good performance. How is running the financial system to the ground considered good performance? And the sheer amount of bonus is absolutely ridiculous. $18 billions ... that is 3,000,000 jobs making $60,000/year.

Feb 04 05:11 PM

[Mike the C:]

This shows how utterly stupid Democrats and their followers are. What is going to happen? Easy, the good managers are going to leave (there were many just under the top tier that did not "cause" the problem). Because, even with a bad job market, most of them can get a job paying more than 500,000. So, you will leave the banks in the hands of less experienced, less competent managers.
Oh, you say, how much worse could they be? Let's take an example. Bank of America was a well run bank that the regulators pushed to acquire Merrill Lynch. Merrill ended up having huge bad loan problems, so Bof A then had to get a bail out. So, the Bank of America execs how had proven they knew how to run their bank well are now limited to 500,000. Those execs could easily move a number of places and make far more money. The second string moves in---and who would move in knowing they could only make 500,000?
A bad situation, when the very good managers are required to steer the ship, is made worse because in America, at least at this time, YOU CAN'T FORCE PEOPLE TO WORK AT A PARTICULAR JOB. They will leave.

Feb 04 05:18 PM

[suttoda:]

In 99% of the situations you are correct. However, in the case of Bank of America, they were in good shape until the government held a gun to their head and made them take Merrill.

When BOA discovered the condition of Merrill, Lewis wanted to cancel the deal. The government gave him no choice.

The fact that they then poured more money to try and make the deal whole was not something that BOA wanted. The shareholders have lost more than 70% of their value plus their dividend and are at risk of losing 100%. Those same shareholders are penalized as tax payers as well. If the government is going to force a deal that causes a solid bank to become insolvent, their should be some protection for the bank and it's shareholders.


On Feb 04 05:08 PM JohnL wrote:

> I agree with your sentiment 100%! Socialism will destroy this country.
> However, the problem is not that the new owners are setting the pay
> scale - the problem is that the government should never have become
> an owner of these firms in the first place.

Feb 04 05:19 PM

[JohnL:]

"In 99% of the situations you are correct. However, in the case of Bank of America, they were in good shape until the government held a gun to their head and made them take Merrill."

suttoda, I won't argue with this either. Forcing a private firm to buy another, distressed firm, is even more troubling than the "voluntary" bailouts. Perhaps B of A should have been given cash without any strings attached to compensate for the Merrill albatross placed around their neck. Dunno. Oh look! It's the dance of the unintended consequences!

Feb 04 06:12 PM

[Tony Petroski:]

I think the pay of 2nd basemen who hit less than 250 should be limited to $250,000 and the pay of Hollywood stars who star in a flop should be limited to $50,000. If we're going to go the populist route, why not go the whole hog?

Feb 04 07:16 PM

[John02144:]

Socialism will not destroy this country. The ever-growing disparity in wealth between the super-rich and everyone else threatens to undermine the middle class, and without a strong middle class, democracy is in jeopardy. $500K would be a fair limit, if it were to encompass total compensation. Stock grants should be included as well, and should be taxed at the income tax rate, not as capital gains (which is absurd.)

Feb 04 08:47 PM

[JohnL:]

"Socialism will not destroy this country. The ever-growing disparity in wealth between the super-rich and everyone else threatens to undermine the middle class, and without a strong middle class, democracy is in jeopardy."

I am equally troubled by the wealth disparity and its consequences -- I just don't think that free markets are the cause or that socialism is the solution. My belief is that the government's combination of heavy taxes, government spending, welfare dependency, subsidies for the rich, constant warfare, fiat money, fractional-reserve lending and other distortions of the marketplace are the main causes for the growing wealth disparity.

Feb 04 09:16 PM