Compensation Caps Will Drive Away Talent? To Where?

by Dirk van Dijk

In response to the public outrage over Wall Street bonuses from companies that got billions of TARP money, the Obama Administration is proposing limits on executive compensation. The details of this appear that it is mostly about the theatrics and image than about the underlying solvency of the banking system.

Under the plan, compensation caps would apply to only firms that require "exceptional assistance" from the government in the future. While this term has not been defined, it appears to mean firms like Citigroup (C) and Bank of America (BAC) that had to come back to the trough a second time, not to firms like J.P. Morgan (JPM) that just took the initial TARP allocations.

It would not even apply to Citigroup, unless they have to come back for a third dip into the pond of liquidity, since past "exceptional assistance" is grandfathered. It also applies to only a relative handful of top executives, and on Wall Street, the biggest paychecks do not necessarily go to those in the top boxes on the organization chart.

The $500,000 limit would apply to only cash compensation; firms could pay unlimited amounts in the form of restricted stock, although the executives could not sell the stock until after the TARP funds are paid back. At best, this is a first step in rolling back the excesses of Wall Street. At worst it is a way of co-opting the stronger measures being proposed by Senators Clair McCaskill (D-MO) and Bernie Sanders (I-VT).

The core problem that the TARP attempts to fix is the under-capitalization of the banks. A million dollars paid out to someone on the bond desk is a million dollars of capital the bank does not have. Billions of dollars paid out in common dividends are billions of dollars that the bank does not have in capital.

The country needs the banking institutions to survive; it does not need the executives of those institutions to become wealthy beyond the dreams of Croesus, and it does not need for common shareholders to be protected.

Those who argue that cutting compensation will cause all the talent to leave must answer 2 questions: Leave to go where? There are tens of thousands of very experienced financial people on the street right now and several major firms are no longer in the business. Are people going to leave Goldman Sachs (GS) to go to Lehman Brothers? To Bear Stearns? And secondly: What "talent"? Could 2,000 people picked at random out of the phone book and put into the top jobs in the banking industry have screwed up the system more than the current crew has? I doubt it.

Let us hope that this is only the first step.

Comments

[Nikola:]

SeekingAlpha, when do we get to rate articles the way we rate comments?

This exact same thesis has been made by me and a hundred others commentators about 3 months ago.

Feb 05 03:57 AM

[User 351306:]

To where? To non-US firms! Or did you forget they exist. For example, if I were the successful head of the equity business at GS or MS, and my compensation were limited to 500K, I would immediately consider opportunities at Deutsche, Credit Suisse, UBS, BarCap, RBS, HSBC, BNP...or any of a number of other firms that would not be limited by the cap. In many cases, this would mean fleeing an American firm to join a foreign firm that received aid from their local government, but which did not have the same restrictions that American firms faced. You would be pushing talent in the successful parts of the business (and let's remember, AIG was put into this mess by a small subsidiary representing less than 1% of the employees) into the arms of foreign competitors at precisely the time that the business most needs them.
Ask anyone who understands Wall Street and they'll tell you that this is populist nonsense designed by vengeful but uneducated politicians, at precisely the time we need to be thoughtful and creative. This is, at best, an inane proposal that will have no impact on behavior; at worst, it will hurt the competitive platform of American firms against foreign competition. In other words, boneheaded!!!

Feb 05 03:59 AM

[prairiedog555:]

You must be one of those fat cat executives. They don't do anything but go to lunch, have a couple of meetings then to the spa. And if the really screw up they have a golden parachute. What man is worth over 1 million dollars a year?

They along with the boards of directors are STEALING from shareholders.

Feb 05 08:21 AM

[tipalia:]

well said prairiedog. Like one senator said " ...they don t get it, they are idiots...". It takes a revolution, main street against wall street, not governments, to change the culture of our society, driven by greed and avarice.

Feb 05 09:02 AM

[bertil:]

It wasn't their talent that brought down the banks etc. Talent has never been a very good measure of true success Check how many talented musicians have graduated from Juliard School of Music (and we never heard from!)

And remember that those populists vengeful folks started the French Revolution! Those very talented and well educated and mannered still couldn't save their necks.

Feb 05 09:13 AM

[BudH:]

All that high priced talent should go out and start a new bank that would really kick asz.... if they can.

Feb 05 11:16 AM

[M-P:]

For those who think the "talent" will go elsewhere, please define talent for me - if "talent" can't perform, what is it ... good luck going to other parts of the world - managing the cross-region regs, the legal diffs, the work councils - they'll be back to the States. Easy to think there are no friction costs - that's a fallacy. Again, I'm all for paying for "Alpha" performance vis-a-vis the industry/market.

Feb 05 05:10 PM

[daveddawg:]

It seems to me that no one understands that all the money that these firms made over their entire history has been wiped out. Lost. Gone to money heaven. I say that monkeys randomly punching buttons could have accomplished the same. OR MAYBE BETTER! If the "talent" left, it would be a blessing. Their management is part of the "talent" right? Or were all the losses caused by some rogue trader in an obscure location, who did it all with no supervision ala ING. Almost any CPA could have done a better job than the "talent".

Feb 05 07:21 PM

[tobby1:]

Being current shareholder in bank stocks, i am not sure if these execs leaving to go abroad is bad thing. i am sure they will be welcomed with open arms and $20 million a year salary to start off with (ofcourse they will have to lay off current staff first). With record these guys have who wouldn't hire them right? I guess it's ok to lay off 1000's of employees to conserve capital but putting limit on exective pay is bad thing?


On Feb 05 03:59 AM User 351306 wrote:

> To where? To non-US firms! Or did you forget they exist. For example,
> if I were the successful head of the equity business at GS or MS,
> and my compensation were limited to 500K, I would immediately consider
> opportunities at Deutsche, Credit Suisse, UBS, BarCap, RBS, HSBC,
> BNP...or any of a number of other firms that would not be limited
> by the cap. In many cases, this would mean fleeing an American firm
> to join a foreign firm that received aid from their local government,
> but which did not have the same restrictions that American firms
> faced. You would be pushing talent in the successful parts of the
> business (and let's remember, AIG was put into this mess by a small
> subsidiary representing less than 1% of the employees) into the arms
> of foreign competitors at precisely the time that the business most
> needs them.
> Ask anyone who understands Wall Street and they'll tell you that
> this is populist nonsense designed by vengeful but uneducated politicians,
> at precisely the time we need to be thoughtful and creative. This
> is, at best, an inane proposal that will have no impact on behavior;
> at worst, it will hurt the competitive platform of American firms
> against foreign competition. In other words, boneheaded!!!

Feb 06 11:41 PM

[Drgon66:]

You seem to see alot these days about auto workers making 73.00 an hour, but you don't see much about pres, ceo Rogers of G.M. making 21.7 million in 2007, if he worked 24 hours a day seven days a week...that comes to 2,477.16 per hour. The stock holders should be up in arms that they were not payed a fair return on their investment.ie.Dividend... the American people should be up in arms that G.M. did not create a savings account so they could weather hard times.IE Now....but instead over payed for this so called brain power....and I am just talk one Corp, G.M. this brain power thesis is through out Corp. America. let me name a few Ford, AIG....why bother every CEO is staling at least 2,000.00 per hour from their stock holders

Mar 06 01:48 PM