Posted on 15 Jan 2010
After a year-long effort by the Obama administration to reform how Wall Street pays its executives, some of the nation's biggest banks beginning Friday will pay out bonuses nearly as large as those in the best years before the crisis.
President Obama has repeatedly blasted the size of the payouts and Thursday called them "obscene" since many Americans "continue to face real hardship in this recession." But the administration has chosen not to address the issue that most infuriates people: the magnitude of the bonuses.
In practice, the White House regards hard pay caps as bad policy and easy to circumvent. Instead, officials have opted to reform how the payouts are structured, tying them to long-term performance, and giving shareholders greater say on compensation.
So far, the mix of harsh rhetoric and more nuanced policies have failed to defuse popular anger over executive compensation. And as J.P. Morgan Chase becomes the first large bank to unveil its pay plans Friday, renewed public furor over the size of the checks is overshadowing Obama's efforts to reform pay practices. Even members of the president's own party are calling on the administration to do more.
Kenneth R. Feinberg, the administration's special master for executive compensation, said Obama has put forward a "significant" reform agenda. But, he added, "many will look back and say, all of what Feinberg did and all of what the administration did is a sideshow if in fact there are corporate Wall Street officials getting" $20 million or $30 million.
Discouraging big bonuses
The firestorm also could threaten Obama's plan to recoup the cost of the financial bailout by taxing the largest financial firms, which he said he hoped would encourage banks to pay smaller bonuses. The proposal will be included in the draft budget delivered early next month to Congress, where it faces a murky future. Some political analysts predict that lawmakers may push for a more punitive tax.
Rep. Peter Welch (D-Vt.) introduced a bill Thursday that would impose a 50 percent tax on big bank bonuses and use the money for small-business lending; nearly two dozen lawmakers signed up as co-sponsors. Proposals already pending in the House include a 75 percent tax on bonuses and a new tax on all financial transactions. Meanwhile, House Financial Services Committee Chairman Rep. Barney Frank (D-Mass.), who favors the administration's proposal, is planning to hold hearings next week to consider additional measures.
A senior official said the White House and Treasury Department considered a one-time tax on bonuses, which is being implemented in Britain, as a way to recover the cost of the government's rescue policies. But administration officials decided it would be difficult to construct an effective tax that couldn't be easily dodged.
Other officials said they want to avoid setting a precedent in which the White House would determine what individual employees make at private firms. The president's bank-tax proposal is consistent with this thinking. While Obama said he hopes banks would cut their compensation to cover the cost of the tax, rather than passing it onto consumers or shareholders, the plan does not force that choice on the companies.
Large banks reported a remarkable resurgence in profit during the first three quarters of 2009 and are expected to show continued financial strength as they report fourth-quarter results over the next week.
Administration officials and many outside experts say federal rescue efforts boosted profits, in particular by providing a vast flow of cheap money that banks used to fund their trading and lending. Since the earnings reflect more than the performance of bank employees, officials say that banks should pay smaller bonuses.
Bank executives counter that they owe the government a debt of gratitude for its intervention, but they say it is not possible to calculate the impact of that help. They add that bonuses are necessary to retain top talent that will otherwise move to other companies.
Rather than addressing the amount of compensation, the federal government has adopted a raft of measures designed to reduce pay incentives for reckless business practices that put companies and the wider financial system at risk.
The Securities and Exchange Commission has proposed giving shareholders an advisory vote on pay matters. Compensation committees are under pressure from the administration and SEC to act more independently when they determine compensation levels. Regulators, including the Federal Reserve and Federal Deposit Insurance Corp., said they will take into account whether financial firms are encouraging bankers to take dangerous risks by rewarding short-term gains. Feinberg was installed by the White House to oversee compensation at firms that had received extraordinary federal aid and has released standards seeking to tie compensation to long-term corporate performance.
Changes in pay policies
In response, banks have started revising compensation policies.
Goldman Sachs said in December that it would pay bonuses to its 30 most senior executives in the form of deferred stock -- shares that cannot be sold immediately -- rather than cash. The company also said it would hold a nonbinding shareholder vote on pay practices at its annual meeting. Other banks with large Wall Street operations, including Morgan Stanley and Bank of America, also plan to shift a portion of executive compensation from cash to shares of deferred stock.
Several banks, including J.P. Morgan Chase, said they will dial back how much they will allocate to compensation. Historically, about half of revenues went to employees. At Goldman, the percentage may drop to 40 percent, though the overall compensation pool may still be in the range of $18 billion.
The furor over bonuses first broke out last year after American International Group, which received an emergency federal commitment of $180 billion, paid multimillion-dollar bonuses to executives at the division that nearly toppled the company. Angry lawmakers proposed measures that would tax those bonuses by 90 percent.
As the banks prepare to report results and bonuses for 2009, controversy has reignited, as have tough proposals on Capitol Hill. Some analysts have warned that nobody knows for sure what will happen. As one government official noted: When it comes to executive pay, reason does not always prevail.