Exec Comp Restrictions Get Tougher

I don't support this blanket limit on capping all compensation but I do have a few thoughts.

1) Why are they retention bonuses if 52 employees who received them quit? Shouldn't there be an incentive to stay tied to these bonuses? Why can't AIG renegotiate contracts tied to 2009 performance? Let the brains behind these deadly instruments unwind them and then get rewarded.

2) Contracts are negotiable especially when one of the parties in distress. Just ask the auto unions who had no choice but to renegotiate pension plans and union contracts worth billions of dollars because they were threatened with bankruptcy. AIG top-brass know that government won't let them collapse. Perhaps, that's why they went ahead with the bonus plan.

3) Almost all the large banks are part of TARP. So where exactly is 'talent' going to migrate in droves? Are they enough boutique and mid-market banks to hire these hundreds of financial masterminds?

Deutche Bank, UBS, Credit Suisse, Barclays, Lazard, Greenhill, Moelis. Just to name a few. In addition to that we are now capping salaries at a level that affects entry level MBAs. So (assuming these firms start hiring again) Harvard, Wharton, Chicago, etc students that would have been heading to Goldman, Morgan Stanley, JP Morgan will now take a job in consulting or asset management or something else. Consultants get all in comp of about 200K their first year and that salary is actually *gasp* allowed to surpass 250K in subsequent years if their performance dictates. Why on earth would a top tier student at a top tier MBA program want to take a job at a TARP bank right now? So it's not just existing talent that will be lost as a result of this 250K salary cap, it's new talent also.

Oh and as a side note, I am SOOO sick of seeing people put talent in parantheses as some kind of a joke implying that these people aren't talented. If you don't think they are then take a look in the mirror. These people went to the same (or better) MBA programs than you or I plan to attend and, due to being near the top of their class, landed in one of the most prestigious post MBA locations. A top 10 MBA puts you in what, the top 1%, in terms of education level? Then to get into Goldman or MS you had to be at the top of this top 1%. Stop acting like these people are morons. NOTE: I realize I've made a similar rant before but I thought it bears repeating

Really? You think current MBA grads even from say, H/W/S, would not accept a job from GS because their salary might be capped at 250K for the next 2 years? And if you believe that banks will be unable to repay TARP funds in the next 2 years, then you probably would no longer be interested in banking as a career.

Going by your assertion of what constitutes creme-de-la-creme in the IB world, there are probably about 2000 fresh graduates between the top 5 schools who would be interested in such top jobs. Why wouldn't the banks/AIG hire them?

Fair enough. If the bank was able to repay in 2 years then accepting pay below 250K for that time period would be acceptable to top MBAs. You're right there. The question is, what will be left of these banks if these restrictions are put in place? I just read an article about an ML banker that brought in $550 million in M&A fees last year - that's real revenues, cold hard cash paid for advisory services not some phanton structured products or prop trading revenues - is it reasonable to pay this guy $250K per year for that? It's the equivalent of paying a salesemen a 0.05% commission. How long is that salesmen gonna stick around? And don't tell me that top talent has nowhere to go in this economy because that argument is completely bunk. Sure that reasoning might apply to the Associate or VP making 350K per year, paying a mortgage, car payments, etc (btw that guy will see the govt cut his pay by 100K and he will no longer be able to afford his mortgage payments) but believe me somebody that can generate $550 million per year for a firm will have absolutely no problem whatsover finding a job at another firm. In fact, the guy I'm using as an example is looking at a number of offers to leave ML and ML is putting on the full court press to try and keep him.

According to Bloomberg the House bill, as written, will retroactively take away all 2008 bonuses from the firms listed above, among others.

As I said in my 1st post, I don't support a blanket limit on compensation. That is just a populist and rushed response by politicians. My argument is that bonuses at AIG could still have been prevented if the top-brass wanted to. After all legal contracts are tenuous in special circumstances. Liddy was concerned about releasing employee names and rightly so. But would these employees sue the company in a public court and reveal themselves?

With regards to the ML banker, people like him are probably the exception rather than the rule. He doesn't represent the entire rank-and-file at AIG. In fact, the financial instruments group received bonuses and they were responsible for the toxic stuff. Are they top talent? Maybe a few. Will all of them leave and cause the entire unwinding effort to fail? I doubt it.

AIG is a complete mess. Geithner, Obama, and the whole administration screwed that one up. Dodd could take a fare share of the blame as well. The British at least put restrictions on executive comp before they gave away the money. The US, not so much. And the Treasury could have witheld the $30 billion until AIG restructured the contracts, and rescinded the bonuses - but they didn't and that was Geithner's mistake. However, the Congressional response is so asinine and far reaching that it borders on the absurd. The government screwed up and should face the consequences. Taxing these people to recover this money is a complete breach of constitutional authority and sets a very dangerous precedent. I mean why would any company ever trust the government as a partner ever again? I think I would rather fall on my sword and surrender the company than have the government as an investor.

I always love to see the other side of things:

https://www.wallstreetoasis.com/forums/h ... -tax-today

My favorite post:

"AIG execs should stage an immediate walk-out and nuke the #$#@ing Dow back to 3,000."

Market has changed now, irrelevant of the actual bonus payout or not, the fact that they were contractually obliged to pay the bonuses shows that the bonus system is broken.
A bonus should be an 'extra' and not guaranteed. The reason for the contracted bonus is for companies to reduce their tax and insurance obligations (usually based on base salary). Either way, the pay structure at banks will be reformed anyhow, and the argument is a moot point, $250k will be a lot harder to come by in the current financial climate for MBA's, and in fact, non-TARP companies are still cutting. A lot of international banks in Tokyo are still in the process of cutting, and my sister-in-law, is currently going through the books of 2 major banks to make cuts for them (she is an external management accountant hired specifically to help reduce headcount of the banks). The analogy of the NBA is a moot point.

The scenario is now the case of Western conference is capped, Eastern conference is not capped but their headcount has been frozen, and they are cutting back to save money, so they won't be offering the same pay deals on the pre-capped days of the West.. in fact, most are not even hiring due to corporate ordered headcount freeze. When the freeze lifts, they know the market is a lot more tolerant to lower pay and bonuses and that there are currently 100,000 unemployed bankers globally, i.e. Supply is higher than demand, and also the way banks are working is will change, so the old style of superstar banker may be outdated.

and certainly, my point still stands about team vs individual, it is definitley a more American thing to focus on the individual rather than the team. Once you go to China/Japan, the dynamic changes and the team is more important than the individual. I'm not saying one is better than the other, but i personally prefer the Eastern mentality.

Read an article yesterday I think that said Sony was putting a freeze on all salaries. Guess that just goes to reenforce the different outlook on success in the East. Unfortunately, I don't think that that mentality would ever fly in America.

Actually my company put a freeze on all salaries and cut the 401(k) match to $0.50 on the dollar up to 6% from a full match up to 6% in January in order to avoid layoffs. Which sucked for me because i won't be around next year to collect my bonus and a nice raise would have been forthcoming after my performance review. Oh well.

As far as the salary freeze goes, that is very common here, especially in middle-market and smaller companies, to try and avoid layoffs if at all possible during a downturn. The reason being is that it is much harder for smaller companies to rehire and train people very quickly when the recovery finally comes.

Interesting article on the bailout and trust between investors and the government. Seems like Pelosi and Reid are doing one hell of a job thwarting any possible recovery.

https://www.realclearpolitics.com/articles/2009/03/government_versus_confidence.html

"And congressional demagoguery is compromising Geithner's own approach to resolving the credit crisis. Since the direct government purchase of toxic debt would be massively expensive, Geithner has floated the idea of enticing private investors to help buy that debt. The government would give loans or subsidies to mutual funds and hedge funds if they will buy toxic securities. But few would make such a risky investment without the hope of large returns.

If those returns are realized, it is easy to imagine how hedge fund managers would be treated when hauled before Congress. "Perhaps the witness can explain to us how he justifies such windfall profits with the people's money? Have you no shame? Give us the names, addresses and phone numbers of every millionaire you enriched at public expense so we can leak them to the press."

What sane money manager would want to partner with a government that blames others for its mistakes, urges the violation of inconvenient contracts and threatens to tax benefits retroactively? One Wall Street expert told me, "Even if people trust the president, they don't trust Congress." This kind of trust and confidence is essential to the next stage of our economic recovery. It is also being actively undermined by the incompetence and hypocrisy of the government itself."

And it continues...

https://dealbreaker.com/2009/03/next-sto ... he-did.php

Evan Newmark over at the WSJs Mean Street sums yesterday's bill up nicely:

https://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_lewis&sid=atlHxXH7FweQ

The most depressing part was that it wasn’t even close.

By a vote of 328-93, the House of Representatives voted for a special tax on evil Wall Street bankers for their crimes against humanity.

That is a 3:1 margin. Apparently at the Capitol, it is better to be a coward who keeps his job, than a man who keeps his dignity.

Too harsh a judgment on our duly elected representatives of the people?

Not at all. In fact, too charitable. Congress may be acting at the behest of the mob. But nothing should excuse that institution’s shameless and shameful behavior over the AIG bonuses.

Nothing.

You can try and put aside all of Congress’s nasty, vile words as predictable Washington grandstanding. But the words have been too jolting and over-the-top to be easily dismissed. Senator Chuck Grassley’s suggestion that AIG execs kill themselves may just be an Iowan’s failed attempt at irony.

But Thursday there seemed to be little irony when Congressman and bill sponsor Charlie Rangel of New York accused Wall Street of single-handedly destroying America. “These people are getting away with murder. They’re getting paid for the destruction they caused to our communities,” he said.

It is an odd accusation. Rangel’s district–like all of New York City–has been living off of Wall Street’s bonuses and tax revenues for years.

I should know. Rangel, a long-time beneficiary of rent-subsidized housing, is my Congressman.

But who ever said that politicians were good with the details? Just look at the messy House draft of the bill. It’s shoddy populism masquerading as tax law. The bill is retroactive and arbitrary. Its objective is vengeance and punishment, not raising funds.

Apparently, if you are a dual-income Manhattan couple earning more than $250,000 a year, one of whom happens to work at a TARP bank, you are America’s new criminals.


Say goodbye bonus and goodbye bank. You can’t afford New York without your bonus. So you will have to leave the TARP bank–just as thousands and thousands of your colleagues undoubtedly will.

I already hear the cries from all the aggrieved taxpayers. Who cares? Where else will they go on Wall Street? They are all overpaid greedy good-for-nothings, after all. But guess what? If this bill passes or some form of it–the biggest loser will be you, the U.S. taxpayer.

The good banks like Goldman Sachs, Morgan Stanley, J.P. Morgan and Wells Fargo will figure a way around this bonus madness and pay off the TARP loans. And the taxpayer will be left holding the bag of American International Group, Citigroup and Bank of America, where the taxpayer has invested at least $260 billion.

The labor market, even for ne’er-do-well bankers and traders, is still a free market. So senior Wall Street talent will desert these banks. And these banks may be full of people you can’t stand. They may be dysfunctional and disgraced. But don’t forget. They are your banks now.

I, like most Americans, am angry that some undeserving execs will walk away with millions of dollars in undeserved bonuses. But I don’t let anger blind me or a re-election campaign guide me–unlike, apparently, three-quarters of our House of Representatives.

Minority Leader John Boehner of Ohio, who voted against the bill, said, “This bill is nothing more than an attempt for everybody to cover their butt up here on Capitol Hill.”

But he’s too generous. This bill is much, much worse than that. It is mob rule. It is an abdication of the duty of Congress to legislate thoughtfully and with due process. And it is an act of cowardice in which what is right or wrong means nothing and what is expedient means everything.

Bonuses and the business school dogma

Business school doctrines and interlocking-executive compensation boards have produced a closed box of compensation dogma: executive must amass huge incomes to sustain their self-images and standing with their peers. This requires bonuses.

This dogma infects the people who matter the most, i.e., corporate executive compensation committees and, until now, complicit legislatures and complacent citizens have let the infection spread.

An academic compensation "expert" recently avowed that executive bonus plans were "necessary" to get "good people" to work their hardest. I asked whether he would expect one executive paid $1 million flat without bonus to work less for his pay than another paid $1 million plus incentive bonus. Anchored firmly inside the "box," this "expert" answered, "yes."

https://www.gainesville.com/article/2009 ... hool-dogma

Wow! this says it all, a bonus should be a reward for exceptional performance and not about quantity of work. Furthermore, I would say that a bonus shouldn't act as a carrot on a stick. Performance is expected, if you don't perform, you shouldn't keep your job, the bonus is for exceptional performance as a reward.

As an incentive, a bonus is precisely a carrot on a stick motivating you to perform above and beyond expectations. Your salary compensates you for meeting your expectations, and is generally determined by what the market is willing to pay for the skills and experience you bring to the table. The bonus is an incentive and a reward to do more than just what is expected. So yes, I would expect 'more' from someone getting $1m + bonus than from someone who got 0 bonus. 'More' being measured however - qualitatively or quantitatively - the organization measures performance. If employees are told there is no possibility of receiving a bonus, I would expect that they would have little incentive to go beyond the bare minimum of what is expected of them.