Today, Kenneth Feinberg, the administration’s special master for compensation, plans to announce that the seven companies under his office’s watch must cut pay packages for their top 25 executives by about 50 percent, including a 90 percent reduction in cash salary. Feinberg also plans to “curtail many corporate perks, including the use of corporate jets for personal travel, chauffeured drivers and country club fee reimbursement.”
An executive at one of the seven companies told the Wall Street Journal that “the terms came as a shock,” and that the restrictions “were clearly much worse than what had been anticipated.” And of course, CNBC, which never hesitates to defend bailed-out bankers and their sky-high bonuses, went to bat for the banks once again, arguing that Feinberg should make pay comparable “across the industry,” lest some bankers take such exception to their pay cuts that they go work at the DMV. Watch it:
CNBC also managed to blame the falling value of the dollar on Feinberg’s decision. But if Feinberg really applied compensation levels comparable to other Wall Street banks, his restrictions would be rendered moot, as Wall Street pay is headed for a record high this year, eclipsing the previous highs from 2007. (For the record, the average DMV employee makes $35,000 per year.) Goldman Sachs alone has already set aside $16.7 billion for compensation.
And this gets at the limitations of the administration’s action. While I think it is entirely appropriate that Feinberg crackdown on the pay at these seven companies, they represent only the tip of the iceberg when it comes to problems with Wall Street’s pay structures.
As Nomi Prins wrote, “by simply tying compensation caps to the TARP program (a year late), Feinberg and the Obama administration are completely ignoring the rest of the $14.6 trillion federal bailout and subsidization of the banking industry, which has helped propel many key banks to 2007 levels of compensation, unfettered.” And as evidenced by Goldman Sachs analyst Brian Griffiths’ comment yesterday that we must “tolerate” income inequality “as a way to achieve greater prosperity and opportunity for all,” Wall Street doesn’t seem too interested in changing things on its own.
The Fed took a step towards reform today, seeking comment on compensation formulas that would defer payment over a longer-term. Indeed, what has to happen — by regulation if necessary — is that a large percentage of any particular pay package needs to be tied to the long-term performance of the firm. This, along with a resolution authority that ensures that banks can fail without bringing down the rest of the economy, will correctly align incentives going forward, and hopefully help to prevent another situation in which Wall Street bankers run to the federal government for aid and then use that aid to line their own pockets.