The Wall Street Journal has reported that regulators are taking some of the bubbly out of bankers' bonuses. This will surely spark some outrage about meddling in private companies' affairs, not to mention executives' paychecks. Still, let's take a deep breath, count to 10, and place the blame squarely where it belongs: on the managements of financial companies and their insatiable desire to get drunk on power, pad their paychecks, and play a terrifying game of chicken on public thoroughfares.
Many investors see no reason to curtail CEO pay, even if it is outrageous, frequently a waste of shareholder money, and hardly a general indicator of exceptional business performance. What gets lost in the debate is that our marketplace really needs long-term, reasonable participants, and for too long, we've seen far more drunken partiers than sober participants.
Short-term incentives set up terrible temptations, and these are dangerous for all of us -- and they make an almost impossible case for the laissez-faire freedom many Americans crave.
Blame the abusers. First, blame the bankers.
Bankers taking their lumps
The Journal reported that some major financial companies are capping top executives' bonuses due to the pressure. Regulatory filings show that PNC Financial Services, Capital One Financial, and Discover Financial Services have put limits on the maximum executives can pocket if they exceed performance targets.
These companies follow those mentioned in an imminent study by Compensation Advisory Partners, which reveals that BB&T, KeyCorp, US Bancorp, and SunTrust had already reduced their maximum performance-linked bonuses.
This doesn't all result from the goodness of these corporate citizens' hearts, though. Rumor has it that the Federal Reserve has made some phone calls to some financial companies, and some even mentioned the Fed's influence over the pay schemes in their regulatory filings.
Granted, the Federal Reserve technically isn't a government entity, but it's no secret that it's intimately involved with the government and has great power over the U.S. economy; some say way too much. Yes, "It's complicated," as some say in social media. Maybe the influence the Fed has been utilizing sounds just short of a government overreach, but there are reasons the entity would pressure the banks under current circumstances.
Remembering the financial crisis
The too-big-to-fail banks' managements proved that they couldn't be trusted during the financial crisis. Some of us truly wished they would be allowed to fail and take the true free-market medicine (I was one of them), but arguments that the economic system would fall like a series of dominoes made that a bit of a scary stance to take.
Granted, it would have felt good to see wrongdoers get what they truly deserved. However, if we were all destined to go Mad Max in the aftermath, it probably wouldn't have been worth it over the long haul.
Despite it all, there have been ample signs that big financial companies have learned little about risk, much less humility. AIG's pro-bonus antics post-bailout pretty much let the cat out of the bag that these are not free-market heroes; they are opportunists, plain and simple.
JPMorgan Chase's Jamie Dimon recently had a fall from grace after the London Whale debacle, with its billions in trading losses, which implied Dimon had less of a handle on risk than investors would have hoped for. The board cut his 2012 pay by half. While the pay cut is a good move, the fact that the scandal even happened was hardly heartening.
In March, Morgan Stanley's board cut CEO James Gorman's 2012 pay by 30%, making him low man on the totem pole when it comes to banker pay. Then again, the Journal's report states that Morgan Stanley also didn't change its overall policies on compensation, and in fact increased its maximum pay levels after having cut them several years ago. However, the company's policy is that if shareholders take a loss, Morgan Stanley's CEO pay can't increase.
The deterioration of economic freedom
There's a fine line to walk in lining up management incentives with shareholder value, and of course the reasoning behind padding many executive's paychecks is to align these interests by giving top management stock and options on top of massive salary, bonuses, and perks.
Theoretically, the spirit of that makes sense, but in reality, it's only logical if the shares are restricted, only to be sold after a very long period of time. Otherwise, the only "investors" managements are aligned with are traders, not long-term shareholders at all. And really, the long-term shareholders are the ones who really matter. They're the ones pushing for strong management teams that don't play Russian roulette with business health, much less economic well-being.
Meanwhile, we already know the short-term view has exposed us to systemic risk in the past. The incentives to take crazy risks to keep the party going are very difficult for short-term opportunists to resist.
Regulators would have far less traction in even dipping a toe into intervention if corporate leaders hadn't abused the system. And of course, the crisis and subsequent bailouts pretty much gave government the very real incentive to want system safeguards, not to mention wanting to calm people's fears. After all, many of us have 401(k) plans and, of course, do use banks in many forms in order to conduct our daily business.
The Dodd-Frank Act was obviously a direct result of all the dirty pool.
It's an easy knee-jerk reaction to draw it all in black-and-white and claim that big paychecks and crazy risks work out because they seem to work right now. It's not true, though. Those who believe taking on crazy risks makes them brilliant and that they deserve huge paychecks regardless of actual performance -- which, as we all have figured out, often doesn't come to pass in the long term -- are not defenders of economic freedom. They're destroying it.
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Alyce Lomax has no position in any stocks mentioned. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group, JPMorgan Chase, KeyCorp, and PNC Financial Services and has the following options: Long Jan 2014 $25 Calls on American International Group. 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.