2008 Bonuses Deserve Scrutiny
Wall Street executive compensation is a big story these days. Given the importance of the topic and the impact on institutional investors, I accepted the invitation to write a guest op-ed piece on the topic for Fund Fire, an Information Service of Money-Media, a Financial Times Company. I've included the article below and welcome your feedback. Click to send an email with your opinion about this topic. Shown below is my piece entitled MoneyVoices: "2008 Bonuses Deserve Scrutiny" (February 12, 2009).
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Fund Fire Editor’s note: This MoneyVoices column is a follow-up to last week’s editorial, Money Voices: "A Case for 2008 Bonuses." That article provoked a record number of reader comments, with many stating their disapproval of bonuses amid the downturn.
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"2008 Bonuses Deserve Scrutiny" by Dr. Susan Mangiero
As an advocate of free markets and industry-self regulation, I find myself in a real philosophical pickle on the issue of Wall Street compensation during this economic downturn.
I fervently believe that compensation should be determined by supply and demand, even if the resulting payouts are deemed “too high” by persons outside a particular industry. At the same time, I am disturbed by what seems to be a material disconnect between employee performance and monetary compensation in the financial industry.
Rewarding individuals for doing a bad job is never a good idea, regardless of whether taxpayers or shareholders are footing the bill. At least company investors get a say on pay structure in the form of one vote per share. The average taxpayer has no immediate voice, other than to complain to legislators or use the ballot box at the next election.
The status quo is almost surely a populist no-go. Change in some fashion is inevitable. The good news is that institutional giants – pensions, endowments and foundations – can and should play a role in leading serious discussions with their Wall Street service providers, including money managers and consultants, about their staff’s compensation.
One might even suggest that it’s an institutional investor’s fiduciary duty to inquire about how much of their fees are being used to reward portfolio managers, traders, analysts and other key persons, and on what basis. If they don’t like what they hear, they vote with their feet, engaging other firms they deem less egregious in terms of pay. Capitalists can sleep at night with this approach since it links buyers’ demands (for compensation transparency) with supply (payment of reasonable, risk-adjusted, performance-linked pay).
Remember, though, that asymmetric payoffs do little to properly motivate workers, so their banishment is good news to anyone who believes in a job well done. In an ideal world, professionals reap the fruits of their labor by selling their bundle of skills to willing buyers at an agreed upon price. The buyer takes into account education, experience and willingness to accept certain work conditions (long hours, deadline pressures, etc.).
Compensation comparisons to national norms make no sense unless adjusted on an “apples to apples” basis. A successful trader who makes a million dollars is likely worth every penny. However, it would be insanity to continue paying people for a job not done well, especially when bad results are subsidized with federal dollars. Hiring and retaining effective workers is always a challenge, perhaps never more so than now. Widespread attention, focused on compensation standards, opens the door to improved practices. Those Wall Street professionals who refuse to budge may end up losing the very institutional clients that indirectly pay their bills.
