Reuters reported today that the Obama administration’s pay czar, Kenneth Feinberg, is starting to evaluate the compensation contracts of the seven firms receiving extraordinary government support — which are the firms his office oversees — and said yesterday that he is willing to “claw back” bonus money that is already paid out.
That’s all well and good, but a new study shows that concerns over a return to perverse pre-crisis pay structures need to go much further than those seven companies. As Gretchen Morgenson reported, “a study of changes made in pay practices by 191 of the nation’s largest companies this year shows that where pay is concerned, enlightenment remains a long way off”:
The study was conducted by James F. Reda & Associates, an independent compensation consultant in New York, and it looked at proxy filings issued by almost 200 companies in the first half of 2009. The firm analyzed changes these companies made to their pay plans that take effect this year. […] Instead of seeing a greater reliance on long-term incentive programs, the Reda report found that changes in these companies’ plans made short-term incentive pay a bigger part of the compensation pie. Let me say that again: The plans — despite the calamities that short-term profiteering has visited on our economy — made short-term incentives a bigger component of compensation.
“If you were going to encourage long-term thinking and behavior, you would reduce short-term pay, but companies have in fact reduced the long-term programs,” Reda said. “This is counter to the direction suggested by the United States Treasury, academics and other expert advisers regarding ways to mitigate risk.”
This is obviously most problematic at financial firms, where short-term incentives lead to excessive risk taking, which, as we’ve seen, can lead to economic calamity. Bloomberg reported today that France is considering an outright ban on guaranteed bonuses of the sort that are creeping back onto Wall Street. While nothing being considered in the U.S. goes quite that far, the House did pass a bill that would give bank regulators the ability to review the structure of pay packages at financial firms, to encourage a move towards long-term incentives.
In the Financial Times, Lucian Bebchuk made the case for giving regulators such power:
Outside the financial sector, government intervention should indeed be limited to improving internal governance, leaving choices over pay structures to shareholders and the directors elected by them. But financial institutions are special, and their special circumstances warrant a broader role for government. Regulation of pay in financial institutions is justified by the very same moral hazard concerns that provide the basis for existing regulation of the sector.
The proposal on the table in the House would not cap amounts, but the knowledge that a regulator could veto a pay package’s structure might make Wall Street banks think twice about pumping up short term incentives. Of course, the regulators would actually have to follow through on the threat to nix packages, but if they did, this could be a welcome regulatory change.