The virtue of patience shouldn't be an alien concept to true long-term buy-and-hold investors. Alas, too many high-ranking employees at big financial companies seem to lean more heavily toward vice. However, they may soon get a swift boot back onto the straight and narrow, courtesy of the Federal Deposit Insurance Corp.
Practical compensation plans for dummies
The FDIC is proposing a requirement that banks hold back half of annual bonuses for top executives for at least three years. That deferred bonus pool would then potentially be subject to clawback provisions, which allow companies to "claw back" compensation paid for what later turns out to be poor performance.
After the financial crisis, many arrogant bank execs still seemed to insist that they were still entitled to huge paychecks and bonuses, even though their companies would have failed without taxpayer bailouts.
According to the recent Financial Crisis Inquiry Commission report, Federal Reserve Chairman Ben Bernanke once privately stated that with only one exception, the largest 12 U.S. financial companies were at risk of failure in late 2008.
Granted, some companies have already voluntarily made the types of moves the FDIC now recommends. Goldman Sachs
Truth and consequences
Long-term thinking, and incentives that encourage it, go a long way toward helping us avoid crises. Corporate governance expert Nell Minow recently highlighted one key takeaway from the FCIC's report: "Compensation systems -- designed in an environment of cheap money, intense competition, and light regulation -- too often rewarded the quick deal, the short-term gain --without proper consideration of long-term consequences."
In another recent post, Minow pointed out that some folks in the financial community continue to try to justify crazy compensation packages. She blasted these individuals as "out of control, unembarrassed, and badly in need of a class in Capitalism 101."
Among the examples Minow provided, Bob Diamond, the American CEO of Barclays
Leave that mentality in Sin City
A basic misunderstanding of capitalism has indeed seemed to permeate our marketplace for far too long. Capitalism should reward creativity, long-term performance, and merit.
Instead, in recent decades we've endured the weird idea that our system's about grifting, grubbing, or whining for bailouts when risky bets don't work out. (What happens in Vegas may stay in Vegas, but wagers don't seem to work that way on Wall Street.) To restore our economy to true health, we need pay tied to legitimately good performance over the long haul.
It's too bad we all had to learn the hard way how harmful incentives tied to short-term greed can be. Unfortunately, it seems like some folks remain determined to never learn. Until they do, we'll need more proposed rules like the FDIC's.
Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on corporate governance.
Alyce Lomax does not own shares of any of the companies mentioned. Try any of our Foolish newsletter services free for 30 days. 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.
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