Executive Pay Restrictions Will Deplete Wall Street's 'Elevator Assets'

At the Wall Street firms where I’ve worked it was often said that, “the assets of the company ride up and down the elevator every day.” This adage recognizes the critical role that individual talent plays in the financial services industry. President Obama’s new restrictions on executive pay are largely symbolic, but to the degree they do impact firms, they will serve to deplete their human assets, driving the most skilled individuals to other firms. As a taxpayer, I want the most talented people to be running the firms which are TARP beneficiaries. Compensation restrictions will tend to push those people to firms that can offer more attractive remuneration packages.

Wall Street’s emphasis on bonuses is stupid. As others have noted, Wall Street views bonuses unlike any other industry. There are few, if any, industries where the majority of decision-making employees can expect bonuses that are in excess of their salaries, often by a factor of several 100 percent. This drives some very odd behaviour that may serve the annual bonus pool, but does little for long term shareholder value or for customers. This is particularly damaging when the most senior executives are tied to this structure.

So why has this system persisted? The answer lies in the tax code. Efforts to curb executive compensation in the early ’90s pushed compensation to be far more bonus-oriented through limitations on the deductibility of salaries (but did not limit other forms of compensation).

Wall Street's bonus culture is a result of excessive regulation. President Obama’s move to impose further restrictions and rules is a step in the wrong direction.

Forbes published an article of mine with more details. You can read it here.

Comments

[theobannion:]

I just finished your painfully dishonest article. And I have just one more comment: Don't you recognize a tax loophole when you fall through it? - politicians pretending to get tough with business, when they're actually doing the opposite?

PR is definitely your forte´.

SOB.

Feb 05 09:14 AM

[prudentinve...:]

You state: "As a taxpayer, I want the most talented people to be running the firms which are TARP beneficiaries."

But if "talent" was in proportion to compensation, then judging by the compensation that was in place, we already had "the most talented people" running these firms; and they made their firms lose so much money, that they have become TARP beneficiaries.

Has the world has turned upside down? Else, how can "the best talent" create these large and staggering losses?

Feb 05 09:14 AM

[stallrocket:]

The "assets of the company ride up and down in the elevator every day"? (emphasis on the first three letters of the word). Let's not forget that in some cases, without taxpayer money, the "assets" are out of business. Such is the talent that needs huge compensation to run formerly viable entities in the ground.

Of course, the truly talented would be quick to recognize that handing out massive bonuses, throwing extravagant parties costing millions, buying unecessary luxury jets, etc, etc, etc, is moronic behavior following handouts from millions of taxpayers who will never experience the wealth these people take for granted. One can only assume that these talents are so disconnected from reality that they couldn't see this public shaming coming .

Truly talented people wouldn't consider this pay limit a problem. They would use their brains and skill to dig out of the hole, pay back the taxpayers and get back to the excellent compensation they clearly deserve for excellent performance.

It's fascinating how some of the most "talented" managers are most talented at compensating themselves no matter how bad their performance. Unlike the rest of the world, they need no-risk" huge compensation just to show up to work. Forgetting about financial institutions for a moment, how many "talented" hedge fund managers packed up with their final massive paycheck after decimating investor accounts?

Is it possible that there are quality, talented people out there who are willing to live in the world as it currently exists in order to reap the future benefits of improving it? I think there are.

Feb 05 09:19 AM

[b.sollar:]

If you need to ask for government money you should be ready for some stipulations. I think 500K is still too much for running an organization into the ground.

Feb 05 09:44 AM

[bricki:]

It isn't a floor, it's a ceiling. I would NOT want anyone managing my money who couldn't figure that out.

On Feb 05 09:13 AM Pent up demand wrote:

> I realize that bashing Wall Street is all the rage, but why can't
> anyone see that $500,000 is too low a floor. Imagine you are a portfolio
> manager overseeing several billion in investments. Catching or failing
> to catch a single mistake in rebalancing the funds can easily mean
> hundreds of thousands in loss/gain for the fund. Do you think doing
> a competent job for fundholders might be worth more than $500k in
> total compensation?

Feb 05 10:43 AM

[bricki:]

Looky here - record numbers of people thrown out of work and crashing values of retiree savings in a financial crises triggered by tomfoolery by people who are now complaining that that they are ONLY going to be able to be paid $500,000 per year.

These people should be in jail, not getting 10x what the average American gets on his job.

The financial industry NEEDS to be made to suffer when it takes government money so it won't be tempted to ever go down this road again.

The companies complaining that they are going to lose talent? You mean the talent that has managed to beggar America?

These companies would be in receivership but for the generosity of the taxpayer. How much talent would stay if pay went to zero?

$500,000 is very generous in my book.

Feb 05 10:54 AM

[Pent up demand:]

Bite me, I made a typo on a blog comment. All I'm trying to point out is that people are throwing the baby out with the bath water.

Those of us in the trenches in Wall Street deal with a lot of pressure and responsibility and live with some of the highest living costs in the country. Take away the incentive compensation for most of us and we will struggle to have even a middle class standard of living in the New York metro area. I am in this industry in the first place because US companies offer neither money nor respect for those in my chosen field (engineering). I saw the writing on the wall as a young engineer. Experienced engineers above me getting paid little more than new hires, if they weren't let go by the time they were reaching 20 years.

But don't let me interrupt those lapping up the populist rhetoric put out by Washington.

Down vote away.


On Feb 05 10:43 AM bricki wrote:

> It isn't a floor, it's a ceiling. I would NOT want anyone managing
> my money who couldn't figure that out.
>
> On Feb 05 09:13 AM Pent up demand wrote:

Feb 05 11:09 AM

[Tickerphilia:]

I would agree that the compensation ceiling is largely symbolic.

A more sweeping change that may be in the wings should be instituting .25% tax on the $ amount of all security and derivative transactions to bring in $150B to the treasury annually. Small investors would not notice. Investment bankers and hedge fund managers will cry foul.

Longer term, antitrust must deal with breaking up the "too big to fail" financial industry so that bad practices allow for failure without affecting companies that engage in sound decision making.

Feb 05 11:32 AM

[Pent up demand:]

>Tickerphilia says:
> ...

The government needs to work on the spending side of the ledger. There is a private and public component to our country's current account deficit. Consumers are swiftly adjusting their behavior to reign in their consumption and government should do the same. It makes little sense to me to raise taxes on the financial industry when government is already forced to provide life support.

A better reform would be to drastically curtail OTC derivatives and bring them onto an exchange. This would increase transparency of counterparty risks and allow enforcement of limits on the size of positions. It has the additional benefit for Wall St. haters that it would bring spreads on these products down, meaning less earning for brokers.

And I agree with your point that we should not allow "too big to fail" institutions to exist. They are a systemic risk that clearly is too dangerous.

Feb 05 11:48 AM

[bricki:]

Millions of people in retirement and in middle America are struggling to maintain a middle class lifestyle. Join the crowd.

Talk about pressure? How about when your home is foreclosed, you are unemployed, and you have children to feed. Why do you think suicide rates are up?

$500,000 is plenty to live comfortably on, even in New York City Metro (I live in NYC Metro so I know what it costs). Many of my neighbors work in NYC, and none of them make that kind of money.

On Feb 05 11:09 AM Pent up demand wrote:

> Bite me, I made a typo on a blog comment. All I'm trying to point
> out is that people are throwing the baby out with the bath water.
>
>
> Those of us in the trenches in Wall Street deal with a lot of pressure
> and responsibility and live with some of the highest living costs
> in the country. Take away the incentive compensation for most of
> us and we will struggle to have even a middle class standard of living
> in the New York metro area. I am in this industry in the first place
> because US companies offer neither money nor respect for those in
> my chosen field (engineering). I saw the writing on the wall as a
> young engineer. Experienced engineers above me getting paid little
> more than new hires, if they weren't let go by the time they were
> reaching 20 years.
>
> But don't let me interrupt those lapping up the populist rhetoric
> put out by Washington.
>
> Down vote away.

Feb 05 11:55 AM

[bricki:]

I agree that raising taxes now is not a good idea. Nor is reducing government spending.

But once normalcy is restored government will clearly need to achieve a better balance between spending and revenue. This will mean both tax increases and spending reductions.

During the Bush administration the financial industry had the best deal they will ever get. Low cap gains and lax regulation. Their share of the economic universe reached record heights. The rich got richer and the middle class got the bill when it was over.

Going forward it is clear that both cap gains and regulation will be treated differently.

Feb 05 12:04 PM

[KSengineer:]

What was the pay level just before these firms needed TARP? I suppose you're position is that these firms were innocent bystanders to this whole debacle.

I've heard the talent argument over and over. The problem is that it's not just talent that a company needs. It's talent plus honesty. Some of the most talented people are also very greedy. And some are verified crooks (like the new treasury secretary and a couple other recent nominees).

Feb 05 02:20 PM

[supersnapp:]

This article is entirely doctrinal. Banking is a simple profession with not much intellectual going on. Banks are privileged elites that are given the monopoly right to create money. They then charge interest on something they don't own. How they lost money on this boggles the mind. Talent....what talent. Any person of moderate intelligence could run a bank better than a PhD who is corrupt. Let the executives leave, the banks will do far better. As far as finance people being highly talented.......give us all a break.

Feb 05 02:25 PM

[Chrisgoesboom:]

We are not throwing out the good talent at all in my opinion. People like you, who left other jobs, to pursue blind and extraordinary profit in the financial world disgust me. The good talent is the kid who sat in class reading Barons in an attempt to learn about the market. The true talent lies with the people who took the time to learn this material on their own, not have it handed to them by a corporate monster. Sitting in class I could think of nothing I would have rather been doing, but that. I could give two shits what I get paid. You can pay me $40k per year to do it and I still would. I love the probabilities you can study, and I love the knowledge I have gained reading IBD everyday. I find it hard to believe you have any enjoyment from your job, or you life, if the income you bring in is that important. I don't work with the extraordinarily wealthy, and I don't manage as huge portfolio, but I still managed to see a return of $300,000 for my clients in the past year.

I highly doubt you have done the same in your line of work at your top tier, unsinkable ship! Please, LEAVE THE COMPANY and let people who truly find this field or work make magic happen while you live in the blind pursuit of something so useless you can't even use it when you die.


On Feb 05 11:09 AM Pent up demand wrote:

> Bite me, I made a typo on a blog comment. All I'm trying to point
> out is that people are throwing the baby out with the bath water.
>
>
> Those of us in the trenches in Wall Street deal with a lot of pressure
> and responsibility and live with some of the highest living costs
> in the country. Take away the incentive compensation for most of
> us and we will struggle to have even a middle class standard of living
> in the New York metro area. I am in this industry in the first place
> because US companies offer neither money nor respect for those in
> my chosen field (engineering). I saw the writing on the wall as a
> young engineer. Experienced engineers above me getting paid little
> more than new hires, if they weren't let go by the time they were
> reaching 20 years.
>
> But don't let me interrupt those lapping up the populist rhetoric
> put out by Washington.
>
> Down vote away.

Feb 05 08:26 PM

[WMBANZAI7:]

WALL STREET RED INKY BONUS BOYS
(Heinrich Hoffman's Struwwelpeter, Inky Boys)
WilliamBanzai7

The Story of the Red Inky Bonus Boys
As he had often done before,
The newly elected President
One nice fine day went out
To see his constituents, and walk about;
Then Johnny Thain, little noisy banker wag,
Ran out and laughed, and waved his big red bonus flag;
And Vikram Pandit came in jacket trim,
And brought his French jet fleet and baseball stadium sponsorship with him;
And Ken Lewis, too, snatched up his toys
And joined the other naughty Wall Street boys.
So, one and all set up a roar,
And laughed and looted more and more,
And kept on singing,--only think!--
"Oh, Obama, we pay ourselves huge bonuses with taxpayer red ink!"
Now tall Secretary Geithner lived close by--
So tall, he almost touched the Wall Street sky;
He had a mighty regulatory inkstand, too,
In which a great Federal goose-feather grew;
He called out in an angry tone
"Boys, you better leave your Wall Street bonus toys home!
For, if Obama tries with all his might,
He he will put your loss riddled banks a bonus black hole overnite."
But, ah! they did not mind a bit
What great Geithner said of it;
But went on laughing, as before,
And hooting about their bonus hoard.
Then great Geithner foams with rage--
Look at him on this very page!
He seizes Thain, seizes Ken,
Takes Pandit by his little head;
And they may scream and kick and call,
Into the TARP black ink he dips them all;
Into the inkstand, one, two, three,
Till they are now bonus capped as capped can be.

Feb 06 12:22 AM

[morph366:]

I have a slightly different take on why bonuses were tolerated and even more broadly why we allowed the banks to act so irresponsibly.

Why did we allow the financial engineering community to mislead us and screw up as spectacularly as they did? Because in a way we wanted them to.

There was a massive act of self deception amongst all sections of the economy that allowed a kind of dissonance where we all knew that the world of investment and finance is high risk but we wanted to believe, even if it required a collective act of ignorance (i.e. ignoring) that certain very clever high priests or financial wizards had come up with a way of making the world immune to financial cataclysms. We sold this notion to ourselves as if it was like a great medical breakthrough a little like purging the world of smallpox through inoculations or relieving pain through anaesthesia.
When historians look back on the recent era of financial policy making and the technology of finance it will look more like the bloodletting of the medieval medical profession.

Feb 06 09:28 AM

[johnbee:]

I was employed as a stock market analyst and portfolio manager in 1960 in the UK by a firm of stockbrokers. My salary was £15 a week. Before then I had studied investment and worked on the floor as a dealer in the UK and Australia and was the first person in the UK to computerize the financials of all Alpha stocks in the UK. I made good money for my clients selecting undervalued assets and set up my own company buying asset rich/earnings poor companies. Five years later I made mself a fortune of £1 million (about $30m today) by the time I was 28 years old but never paid myself more than £5,000 a year in those years. The equivalent of that is today is around £100,000 and its plenty to live on. If these bankers and hedge fund managers want to get rich they need take the risk of buying shares in the companies they join on loan and not being able to sell them for 5 years and not receiving any annual pay more than £100k. There are always plenty of people who will do the work for that.
The movie industry is no different. If all the stars got wiped out in one year there would be just as many the next year.

Feb 06 12:03 PM

[Fabien Hug:]

I agree with most of you; I am sure that capping exec comp to $ 500K is no threat to the system. As for talent, as soon as free money vanished most of the talent vanished with it.
However, there is one point that drives me mad and nobody seems to mind about it: compensation will be subject to a NON BINDING vote of the shareholders. Who owns the company ? That's where we should start. Let the owners of the company decide and have a binding vote.

Feb 06 01:48 PM

[Phil Trupp:]

Taxes led the lemmings of Wall Street over the cliff? The Street's "talent" rides up and down the elevators every day? Are we speaking here of the talent that caused the current meltdown? Oh, I forgot: The regulators forced them to catastrophic failure. And the IRS somehow inflamed the greed and stupidity of the i-banks? Paulson, et al., are victims of the tax code? Sir, the editors of "Seeking Alpha" did you a special favor (for whatever reason) in publishing your tortured arguments. (BTW: Your article reads like a high school essay. Maybe you're better at numbers than you are at grammar and logic, but I have my doubts.)

Feb 06 02:06 PM

[henarl:]

This is the same old stale argument that grossly excessive compensation is needed to obtain and retain the most "skilled and talented" people. Who has benefited from the efforts of these overpaid prima donnas? Certainly not the stockholders of Bear, Lehman, Merrill, Citi, B of A, Morgan, Wachovia, AIG, Fannie, Freddie, etc. who watched their stocks go in the dumper. Certainly not the mid-level employees of these companies who have been and are being layed off by the hundreds of thousands. Certainly not the average working Americans who have lost a big percentage of their 401k and IRA retirement savings. Certainly not the taxpayers who are going to pick up the tab for trying to keep these companies alive. No, the ONLY benificiaries of these Masters of the Universe are themselves. Do we really need a system where the efforts of our most "skilled and talented" executives
benefit themselves to the detriment of everyone else? I think not!

Feb 06 03:23 PM