How to Fix the Compensation Issue… Yesterday!
With all the tone-deafness that followed the great compensation debate of 2009, I have a very simple solution. The problem, despite what people commonly believe, is not the absolute level of compensation. No, it’s the fact that management’s personal incentives and employees’ incentives are aligned–shareholders are still in the wilderness. How many times have we heard the trite, absolutely silly refrain stating “we need to pay the valuable people that know where the bodies are buried so they can dispose of them!”? Way too many. Although, there are dozens of examples of retention bonuses being paid to people as they resign… Idiots.
So, what do I suggest? Add all compensation, beyond a base limit, say $250,000, as T.A.R.P. debt to institutions who have already received funds under the program–and the interest rate from this new debt should be very high. I would suggest… okay, I never merely suggest… I would demand (better!) that this new debt carry a high coupon. Maybe even ensure the interest owed is cutely linked to the way these publicly owned (partially, anyway) institutions are negatively impacting our economy. One example: this new debt could carry an interest rate equal to the greater of the (a) median of the top quartile of credit card interest rates issued by the company in question and (b) 24.99%.
Now, what does this do? It better aligns management and shareholders. How can a C.E.O. allow divisions that lost billions to run up it’s debt? And, how can an institution award these bonuses necessary to pay people, right out of taxpayer money, if they aren’t willing to pay it back later? By definition, every dollar that flows into the pockets of employees can’t go back to the taxpayers whose money saved these same institutions. Once managers need to actually justify why they are paying people, due to the higher cost, I guarantee fewer employees will receive these higher bonuses. Gone will be the cuspy performers who are being paid because Wall St. is a creature of habit. This will create a wholesale re-thinking of compensation at many institutions. And, honestly, it’s long overdue. To be honest, I don’t really view this higher cost as excessive, either. People being paid 8-12% of profits (it’s actually revenue traders are compensated on, but don’t tell anyone that) should wind up actually costing 10%-20% of profits with this excess debt, perhaps as high as 30%–but these employees continue to be employed and able to profit due to taxpayer funds to begin with. It’s time managers are required justify, to their boards and owners, why high compensation for various employees is necessary. And, since companies say a surtax or banning of bonuses is bad and bonuses are absolutely required, they should be more than willing to pay these higher rates–they need these people after all!Finance, Financial Institutions, Fixed Income, Information, Networks, People, Platforms, Politics, Risk, Structure, Systems comment below, or link to this permanent URL from your own site.