Thursday, February 12, 2009

Bankers Bonuses

This is old news but it still amazes me.  I have always thought that bonuses are tied to performance, and in the context of banking, that would be specifically in the form of profits, or at least performance relative to your competitors. How does one rationalize doling out billons of dollars in bonuses when you have lost tens of billions of dollars and had to be bailed out by Bank of America and by extension the taxpayer?  I think the decent thing for Merrill Lynch to do would be to replace those bonuses with Mortgage Backed Securities that they are currently holding at whatever their current book value is (as opposed to what they would actually sell for).

And when Republicans stammer that some sort of compensation caps for those that get taxpayer monies will drive away good talent from the financial industry I want to scream.  Where are these people going to go?  Have these brilliant politicians not noticed that the financial industry has contracted severely.  And by the way, has the question ever occured to them that some of this "talent" was not that talented in the first place, or at the very least their talents were misdirected.  These bankers make the Bush administration prosecution of the Iraq war and response to Katrina look almost adequate by comparison.

What is the value proposition that these bankers have that can enable them to command such bonuses?  Clearly it is not there ability to manage risk.  Have they threatened society collectively "let us get fat and happy in the financial sector or else we will start to run your health care and prosecute your wars"?

I have been always squeamish about the meddling with executive compensation but I think it is nigh time to have that conversation.  The levels of compensation are so great that the incentive or temptation to engage in corporate looting have pushed society to a fragile state.  I think there has to be something that aligns the compensation with the long term health of the company. Brad DeLong has suggested bonuses that are redeemable if the company meets certain thresholds ten years out as opposed to one quarter out.   I would also like to see clawback provisions for salaries once they get into the F-U money range- maybe 8 digits.

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