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Bernanke: Why Executive Compensation Matters

March 20, 2009 RSS Feed Print

Federal Reserve Chairman Ben Bernanke said today he wants bank compensation practices more closely monitored to prevent "mismatches between the rewards and risks borne by institutions or their managers." It's about more than quelling public and congressional anger, then.

From the AP:

Banking regulators have observed that "poorly designed compensation policies can create perverse incentives that can ultimately jeopardize the health of the banking organization," Bernanke told a meeting of smaller "community" banks in Phoenix, Ariz.

Why is it that banking supervisors need to be urged to monitor compensation practices, if the health of the organization is indeed at stake? Edward Lawler, a professor at USC and expert on compensation, had this to say about executive compensation when I interviewed him last year:

The problem with executive compensation is that there is no countervailing force. There is nothing really working to hold it down. The outrage that comes out annually as the proxies come out is about the only force that is acting potentially to push it down. There are no shareholder votes. Board members are often CEOs of other companies, and most of them are smart enough to realize that if their neighbor gets a raise, then that raises the overall compensation level for executives.

The other killer is: You don't want to be below market, do you? For your executive comp? You want below-market executives? Of course not. So we've got this never-ending upward spiral of compensation.

One common dilemma is: How do you measure performance? Not surprisingly, executives say: Well, that depends. If there's a downturn, did we go down less than the other guys? And if it's an upturn, maybe I didn't perform quite as well as the other guys, but look at the extra shareholder value that's been created.

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Open letter to Jake (DeOstrich) DeSantis:
Re: Resignation Letter (a masterpiece)
Dear Jake,
Congratulations on a fine career. I hope, and expect it will continue. Your hands are clean.
On the other hand, it would have been nice to have received a “heads up.” Perhaps a hand pointing towards the villains and wild shouts of “unclean, unclean, unclean.......” ala Zero Mostel in “Forum”.
As a “Vice” president to president Joe Cassano who raked $17,500. from the pot every hour, 8 hours a day, 5 days a week, 50 weeks a year you undoubtedly did your “dear ol' Tech” best with your good ol' slide rule. Had you availed yourself of the calculator in the “Accessories” folder of most personal computers, things could have, perhaps should have, added up differently. (The US President gets a nominal $200. per hour. The US Vice President gets $110. per hour. The $742,006.40 you received March 16 is nominally $371 per hour.)
It is unclear how much better H. Greenberg did than Mr. Cassano. The total hourly cost of management (paid, raked, or skimmed) must have been phenomenal. (But worth every cent, of course.)
Misfeasance, malfeasance, collusion, complicity, aiding, abetting, etc. are to be avoided. One must not be in any way involved in – or responsible for such happenings. They are “unclean”.
Yes, contracts should be kept. The baying hounds (dogs) of the financial committees have been derelict. It is their tradition.
Oh, Thanks again for doing your duty/duties. And keep those hands washed.
Sincerely,
Rodney Horton '54

Rodney Horton of PA 2:47PM March 27, 2009

Open letter to Jake (DeOstrich) DeSantis:
Re: Resignation Letter (a masterpiece)
Dear Jake,
Congratulations on a fine career. I hope, and expect it will continue. Your hands are clean.
On the other hand, it would have been nice to have received a “heads up.” Perhaps a hand pointing towards the villains and wild shouts of “unclean, unclean, unclean.......” ala Zero Mostel in “Forum”.
As a “Vice” president to president Joe Cassano who raked $17,500. from the pot every hour, 8 hours a day, 5 days a week, 50 weeks a year you undoubtedly did your “dear ol' Tech” best with your good ol' slide rule. Had you availed yourself of the calculator in the “Accessories” folder of most personal computers, things could have, perhaps should have, added up differently. (The US President gets a nominal $200. per hour. The US Vice President gets $110. per hour. The $742,006.40 you received March 16 is nominally $371 per hour.)
It is unclear how much better H. Greenberg did than Mr. Cassano. The total hourly cost of management (paid, raked, or skimmed) must have been phenomenal. (But worth every cent, of course.)
Misfeasance, malfeasance, collusion, complicity, aiding, abetting, etc. are to be avoided. One must not be in any way involved in – or responsible for such happenings. They are “unclean”.
Yes, contracts should be kept. The baying hounds (dogs) of the financial committees have been derelict. It is their tradition.
Oh, Thanks again for doing your duty/duties. And keep those hands washed.
Sincerely,
Rodney Horton '54

Rodney Horton of PA 2:46PM March 27, 2009

I agree with Liz, the points apply to all publicly traded companies not just financial companies,and I have made those points before that 1) Board of Directors are comprised of CEOS of other companies, it is a good ole boy club, with little real incentive to be demanding on the CEOs, and 2) Executive compensation consultants keep pushing up perks, one easy way is to say well company xyz gave their CEO this, so I should get at least that because we are a bigger company, I did this or that better than xyz competitiors and volia you have a compensation race, then next time company xyz CEO says well look at that company they gave that CEO this much more and I deserve that and more, and it just becomes a vicious cycle that gets more absurd, and you have results like the Comcast exec who is like 200yrs old being guaranteed his salary for 5 years after his death, how is this pay for performance?
The Board of Director system is broken, it does not work, it is like an anachronistic form of government, like a monarchy, that does not work. Board of Director system is just too weak and does not work.
Capitalism is supposed to be about risk and reward. Now you get just plain perverse results where if executives do well they are paid, if they ruin the company they are paid millions and go off into the sunset. It reminds me of Rome, the USA was once a great country but now it is a decaying society.
Maybe we need a Great Depression II to expose all the decay, corruption, idiocy, and cause a radical change, otherwise it will just be the same status quo.

Steve of VA 1:41AM March 21, 2009

Bernanke: Why Executive Compensation Matters

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