An article by Robert Shiller, a Yale professor, appeared in the June 20 edition of the New York Times called “Help Prevent a Sequel. Delay Some Pay”. It describes the Squam Lake Group, a band of 15 professors of financial economics who get together and pool their resources to solve the problems of the day. The article goes on to describe a solution for the whole banking executive compensation problem.
But let’s backtrack a little. The article makes a number of claims and assertions, so let’s look at these.
Claim 1: “But it’s not the high level of executive salaries that helped cause the financial collapse.”
Well, OK, not salaries themselves, which in finance were pretty low, at least on the Street. At least they were until poorly written compensation restrictions managed to boost them out of the water. But no one’s claiming that it is salaries that caused the problem. It was pay. High pay. All of it. Bonuses, stock, stock options. Not just salaries. Why would you be tempted to cause the downfall of the financial system for $600,000 a year? No one would. But for $60 million a year, now we’re talking.
Claim 2: the 1993, Section 162(m) $1,000,000 pay cap directly contributed to the crisis because in seeking to limit compensation it encouraged it to balloon in the form of stock options.
Well, actually most of the compensation delivered to Wall Street executives came in the form of stock and cash, rather than options, but the theory is the same. And yes, it was a stupid law, and had as many unintended consequences as most government interventions in pay, but I don’t think it deserves all the blame. Didn’t the whole idea for stock options come from academia in the first place?
Solution: “the Squam Lake group recommends that companies be encouraged to withhold a good part of the compensation of their top executives for a number of years, and that it should not take the form of stock options.”
Fair enough.
But most, if not all, of the banks are already doing that.
In fact, most, if not all, of the banks were doing it all along. Just read the proxy statements. It’s all there.
All banking executives took a major hit in the collapse of stock prices. Some of them mortal blows in the case of Lehman and Bear Stearns. Literally billions of dollars of restricted stock lost.
But they didn’t care.
Why? Because they’d already made so much money out of the banks anyway that a few hundred million more didn’t make any difference. So it was the level of pay. And deferring it, unless you defer it all, isn’t going to mean squat. Particularly if you don’t tie it to future performance conditions.
Paul Hodgson - Senior Research Associate
