July 27, 2010
Bankers’ Pay In 2009, there was a lot of talk about reasonable limits on bankers’ compensation, after some breathtakingly risky lending almost crippled the financial system. A czar was appointed. Politicians said the bankers had better not use their bailouts for bonuses.
Well, they did.
Financial institutions got most of their bailouts in late 2008 and early 2009. A report issued Friday by the White House pay czar, Kenneth Feinberg, showed that by Feb. 17, 2009, when Congress established tighter pay standards, 17 banks — including Citigroup, Goldman Sachs, JPMorgan Chase and Bank of America — had paid out $1.6 billion in bonuses, golden parachutes, retention awards and the like. One handed out bonuses equivalent to one-quarter of its bailout.
President Obama’s effort to curb executive pay at bailed-out financial institutions was hobbled from the start. Mr. Feinberg was appointed only in mid-2009. He was allowed to veto compensation packages for top bankers at institutions that had received taxpayer funds, but only until the banks repaid them.
Mr. Feinberg suggested that the banks’ directors give their compensation committees the right, in times of crisis, to void pay contracts and restructure, reduce or even cancel bonuses and other compensation. This is a good idea that should not remain merely a suggestion.
The bankers’ pay will now be monitored by the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency, which issued joint guidelines in June. The aim is to ensure that bankers are not encouraged to make risky decisions at little personal cost that can lead their banks to ruin. The regulators are reviewing incentive practices at large banks. They have started providing assessments of pay policies and asking for changes when they decide too much risk is being encouraged. The Fed expects to publish a report on the issue in 2011.
The guidelines broadly make sense. They suggest deferring compensation as one way to ensure bankers are paid only for investments that pay off; not those that blow up a year or two down the road. But we worry that they still leave too much to the discretion of the banks.
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