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Bank Execs Try to Justify Outrageous Pay--Again

Did I miss a memo? When did it become acceptable again to justify outrageous pay packages for executives? Marie Antoinette would be embarrassed by the speed and hypocrisy in banks' claims that multi-million dollar bonuses are appropriate and even necessary. And yet, here they are, out of control, unembarrassed, and badly in need of a class in Capitalism 101.

Here are four of the most egregious offenders.

  • Bob Diamond, the American CEO of Barclays, belligerently told a parliamentary committee:
    "There was a period of remorse and apology; that period needs to be over. We need our banks willing to take risks, to be confident and to work with the private sector in the UK to create jobs and improve economic growth."
    This seems to signal that Diamond, who did not take a bonus last year, intends to take the reportedly 10.6 million dollar bonus he is scheduled for this year. His previous bonuses totaled $27 million with no clawbacks for the banks' subsequent poor performance.
  • Steve Eckhaus is a lawyer "who estimates he has negotiated well over in $5 billion in banker pay over the years, including several $100 million pay deals" and still insists that his clients are "pure as the driven snow." Steve Eder of the Wall Street Journal reports:
    Among the pay packages with Mr. Eckhaus's fingerprints is Tom Montag's May 2008 deal to join Merrill Lynch, now part of Bank of America Corp. The package, which according to an SEC filing included a $39.4 million guarantee, was among those that caught the eye of regulators in the fury over pay after the financial crisis.
    "It was understandable why there was anger," says Mr. Eckhaus, but "the crisis was not caused by Wall Street fat cats. It was caused by a confluence of economic, political and historical factors."
    Those economic, political, and historical factors? That is what Mr. Ekhaus' clients are supposed to understand, track, and respond to. That is, in fact, exactly why we pay them the big bucks -- when they are right. It is appalling that he continues to argue that they deserve the billions on the upside but the taxpayers should pay the costs of the downside.
  • And then there's the New York Times Dealbook report from Eric Dash about Goldman Sachs finding a loophole in the plans to tighten the link between pay and performance. "Using complex investment transactions, they can limit the downside on their holdings, or even profit, as other shareholders are suffering." It reminds me of the beggar's line from "Fiddler on the Roof," when turned down by a man who had a bad week. "So, you had a bad week -- why should I suffer?" Except in this case, Goldman executives are responsible for the bad week; they just don't want to be paid that way.
  • Perhaps the winner for breathtaking audacity, however, is in a Washington Post article by Philip Rucker and David Hilzenrath about the business community's response to Congressman Darrell Issa's request for a list or burdensome regulations, especially those that obstruct job creation.
    [T]he Business Roundtable objected to a requirement that corporations disclose how the chief executive's pay compares to that of the typical employee. Computing the ratio would be "very difficult and expensive," the group said, and warned that companies could shed jobs to game the system.
    "It could potentially cause companies to take actions that result in less employment, such as outsourcing, to produce better ratios," the group wrote in its Jan. 7 submission to Issa.
    So, to recap -- business should not have to disclose compensation ratio data, not because it is misleading or unimportant, but because the numbers could be so embarrassing that they would have to take action contrary to the interests of the company and the economy to avoid humiliation. As fiduciaries, they must make decisions based on the company's sustainable growth and long-term shareholder returns. And, we would hope, their incentive compensation is structured to align their interests with those goals. So, what they are saying here is that having to tell the truth about their pay in relation to the average worker would counteract their legal obligation and their long-term financial incentive.

    Capitalism 101: Pay for performance. Don't pay for poor performance. And the best way to keep things honest and efficient is transparency and a genuine market test. All of these principles are violated by the examples above, putting the credibility and stability of our economy at risk.

    Do not despair, however -- my next post will have some signs of progress.

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