One man who is spending a lot of time thinking about that question is Kenneth Feinberg, who, for one of the toughest jobs in Washington, is getting paid nothing. As the Obama administration's "compensation czar," Feinberg listened to arguments from the financial firms with the biggest government bailouts that anyone else would consider absurd.
Citigroup and Bank of America, for example, concluded that everyone in their executive suites was above average when compared with peers at other giant banks that didn’t need a bailout. Or there was A.I.G.’s behind-closed-doors argument against Feinberg’s directive to pay its top people in large part with A.I.G. stock. The company’s reasoning? That the stock — trading briskly at the time at around $40 on the New York Stock Exchange — was actually worthless. Yet Feinberg would be pushed by staff at Treasury and officials of the Federal Reserve Bank to accept that argument and others in order to keep the captains of these broken companies from quitting.
Brill notes that part of what makes the issue of what a banker is worth complicated is that people can mean different things when they ask the question. Does the pay meet some innate "fairness" test in comparison to what we pay other employees at the same firm or to people whose jobs involve risking their lives and saving the lives of others? Or is our commitment to the free market so great that we can accept the individual anomalies that result? I would describe this as a choice between an outcome-driven sense of fairness and a structure- or process-driven sense.
Brill acknowledges that structural reforms through the tax code or use of comparables have been ineffective. On the contrary; pay at the top levels has skyrocketed.
Over the last 50 years, the ratio of top pay to average pay at public companies has multiplied roughly 11 times (24:1 to 275:1). That’s more pay in one workday for the chief executive than his average employee makes in a year.
Brill points out Feinberg's very circumscribed jurisdiction (a limited number of executives at only seven companies and only until they pay back their TARP funds) is not enough to create any enduring change.
Will Feinberg’s work become a model for changing that structure? He has said he would like for that to happen, and the Federal Reserve Bank has announced that it will soon require all major banks to abide by structural guidelines intended to assure that executives are compensated based on performance and that they are not given incentives to take undue risk. European regulators have been talking tough, too. And Goldman Sachs has already mimicked the centerpiece of Feinberg’s new pay structure by dispensing all bonuses to its top people in stock that must be held for five years. That structure, rather than the actual amounts he awarded, could be Feinberg’s lasting contribution — but only if its influence spreads beyond the corporate boardrooms that have been temporarily in the public spotlight.
That will happen, Brill concedes, only if corporate boards and institutional investors do their part.
As for more tangible reform, Warren Buffett has written that pension funds and other big institutional shareholders are the key, because they have the expertise and power, if they choose to use it, to influence the boards of the companies they own. Perhaps these powerful shareholders should give Feinberg another assignment.
Nell Minow - Editor
