Cleaning Up Dirty Bonuses

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Earlier this week, the Securities & Exchange Commission announced a proposal that would grant it the power to regulate Wall Street bonuses. While you might disagree with the philosophical and economic ramifications of such a move, when you rationally look at the way many financiers have behaved, the proposal shouldn't surprise you.

Too many major players at financial firms have learned woefully few lessons from the harrowing financial crisis in 2008. The New York State Comptroller's Office recently revealed that overall Wall Street pay increased 6% in 2010. A Deloitte Touche Tohmatsu survey further found that just 37% of surveyed companies had meaningfully addressed risk-management concerns in their compensation policies.

Filthy lucre
In response to this indifference, the SEC seems ready for a fight. The commission has suggested that it may require financial companies (including brokerages, major banks, and hedge funds) to disclose detailed information about bonuses. The SEC could then decide to block any payouts that seem excessive.

Anyone who has followed corporate governance issues knows that it can be hard to define "excessive." But as Supreme Court Justice Potter Stewart said of pornography: "I know it when I see it." Faced by the apparent threat of economic Armageddon, the American people got blackmailed into bailing out banker bigwigs. Rather than displaying humility and gratitude, the executives in charge of those banks kept demanding the same rich rewards they'd always received. In the face of such naked greed and lurid indifference, I'm not surprised that the SEC seems ready to start swinging.

Shake your moneymaker
The SEC probably won't propose similar scrutiny on compensation beyond major financial firms. Most industries don't pose the kind of systemic risk that those companies do. But even if regulators don't insist that companies more closely tie pay to performance, shareholders increasingly will.

Perhaps to prevent government intervention and shareholder fury, several major companies recently docked their underperforming executives' pay:

  • BP (NYSE: BP  ) has told three top executives to forget about bonuses following the Deepwater Horizon disaster and subsequent Gulf oil spill last year.
  • Johnson & Johnson's (NYSE: JNJ  ) CEO William Weldon saw his 2010 bonus shrink by 45% after recalls battered his company's performance.
  • Bank of America (NYSE: BAC  ) has announced that it will neither give pay raises nor award cash bonuses to top management team members this year.

In addition, Beazer Homes (NYSE: BZH  ) CEO Ian McCarthy will pay back $6.5 million and relinquish tens of thousands of shares of his company's stock. That agreement stems from a settlement with the SEC, which contends that the company released fraudulent financial statements in 2006.

Time to clean up the act
I find it pathetic that companies need the threat of regulatory intervention before they start to curtail obscene pay without adequate performance. Whether they like it or not, more businesses need to implement merit-based pay for top executives, and introduce incentive schemes that reward long-term excellence rather than short-term risks. Let's hope we won't need such threats to inspire greater humanity -- and humility -- in our corporate leaders. Shareholders deserve nothing less.

Check back at every Wednesday and Friday for Alyce Lomax's columns on corporate governance.

Motley Fool Options has recommended a diagonal call position on Johnson & Johnson, which is a Motley Fool Inside Value pick and a Motley Fool Income Investor choice. The Fool owns shares of Bank of America and Johnson & Johnson, and through a separate account in its Rising Stars portfolios, the Fool has a short position in Bank of America. Motley Fool Alpha owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned; for more on this and other topics, check back at, or follow her on Twitter: @AlyceLomax. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (17)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 04, 2011, at 5:39 PM, capttomato wrote:

    j&j,weldon should get no bonus at all he should get a wage cut

  • Report this Comment On March 04, 2011, at 8:38 PM, bigkansasfool wrote:

    I like this idea though it's not likely to get anywhere with a moderate republican in the presidency and republicans controlling the funding of the SEC.

    It's getting harder and harder to find companies to invest in where the CEO has skin in the game. There should be no indemnity for CEOs and board members and they should be required to have a large percent of their net worth in the company (and be contractually required to keep that percentage for 5 years after they leave!). The system is setup for them to risk everything because they are rewarded for the wins but not penalized for the losses.

  • Report this Comment On March 04, 2011, at 9:06 PM, ynotc wrote:

    Governement regulation always works so well that more of it sure to be the answer for all of our woes.

    No one seems to notice that all the laws needed to catch Madoff were already on the books but the SEC decided that he was a good guy and chose not to investigate allegations or complete scheduled audits.

    The answer is not more regulation it is to get rid of the incestuous relationships. The boards and the SEC do not represent our interest. They are part of the good old boys club.

    If people like Buffett, who's interests are alligned with that of his fellow shareholders, were common TMF would not write about him so often.

  • Report this Comment On March 07, 2011, at 11:53 AM, ActFoolishly wrote:

    Glad you covered this Alyce. The major banks have been "privatizing profits and socializing losses" and the only reason Madoff is in jail was because he made the mistake of stealing from the rich. Until penalties for this behavior are real, this will only continue. There really is no incentive right now for the banks to change their behavior.

  • Report this Comment On March 07, 2011, at 4:24 PM, firemachine69 wrote:


    Considering both Reps and Dems have their hands in the cookie jar with thise big banks and their ludicrous pensions, do you really think they'll start wagging their finger at the hand that feeds them?

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