How do we go about changing the way bonuses are paid amongst our bankster and financial betters? It seems to me one of the biggest problems is that the way their pay structure is set up, they are encouraged to do reckless crazy things in the short term to get insane bonuses, and then when the shit hits the fan, they can just jump ship and a bunch of people who had nothing to do with their decision making are left to pick up the pieces. Recently, that has been you and me.
Is there any way to curb this. Is there any way to structure bonuses based partially on the past performance, but paid out over a five year period, to take into account the future performance of the company. A huge tax rate on bonuses unless they are paid out over time? If the company does poorly because of your decisions the next couple of years, your bonus disappears. Ideally, wouldn’t we want these folks working more for salary than for bonuses?
Just throwing some thoughts out there.
And yes, I know this will cause all sorts of howls of socilaism and government control.
Athenae
I’d rather see limits on severances than on bonuses. Huge severance packages for executives in all walks of corporate life encourage two things:
1. Retention of morons and assholes so as not to have to basically pay them to leave.
2. Total lack of incentive to do well as head of a company. If you told me I had a $1.7 million severance waiting for me I’d get myself fired so fast your head would spin.
A.
El Cid
FWIW, I think there are two questions in there: what might best be done to deal with those issues, and which if any of those steps might be attempted and potentially achieved in our actual political system.
Ash
When it comes to executives, and even middle management, doesn’t something like 70% of their gross income come from bonuses?
That’s just really fucking ridiculous and stupid and probably will never change.
Just Some Fuckhead
I think we start by going to Joe Lieberman and asking him what he wants.
Roger Moore
I think that the ultimate way of curbing this- and many other problems with our business environment- is a more fundamental structural reform. The underlying problem is that management has managed to steal control of most companies away from their stockholders. The net result is that businesses are being run first to benefit management and only secondarily for their nominal owners. That requires fundamental reforms to corporate governance. Once CEOs aren’t effectively appointing their own boards and compensation committees, their compensation packages will be reduced without any special structural effort.
danimal
Well, hell, why not try actual socialistic means: a 75% top tax rate should do the trick. The rich will have to find other ways to milk the system.
Max
I think that is already in there. I pay like 40% tax on the performance bonuses I receive. Obviously, it’s not as much as the bankers, but it’s not nothing.
Doctor Gonzo
Easy: regulate banks so as to slash profits (“Make banking boring” as Paul Krugman puts it). Strict limits on leverage, collateralization, etc. If people want to gamble with money, do it in hedge funds and make it clear that there will be no bailouts if they screw up.
The major problem here is that banking, as far as most people understand it, has become conflated with gambling in derivatives, and because banks are so important, this gambling has an implicit government bailout guarantee. Strongly separate the two and things will go back to normal.
SGEW
I’m of the belief that the only way to get at the root problems is to overturn Santa Clara County v. Southern Pacific Railroad Company, something that J. Sotomayor has impishly hinted at.
Other than that, I’m at a bit of a loss for specific proposals.
Joe
I think that if one good thing is to come from the tremendous pain which has been and will continue to be thrust onto the American public, it will be for us to completely reassess our way of life and the financial rewards offered for various activities in our society. I think it is the perfect opportunity to weigh the social costs and benefits of various activities in our society. I am willing to consider significant compensation for activities which benefit the public good. If Goldman banksters can make a legitimate pitch for how their activities increase the public good as opposed to robbing from the unwashed masses, I would reconsider my hatred of them and their activities. Otherwise, they can go to fucking hell.
Also, the celebrity culture can go with them. While entertainment provides some societal good, the compensation is ridiculously out of proportion to that benefit.
Violet
I like the idea of taxing the bonuses unless they’re paid over time. I’m not very fond of the government telling people how much they can be paid, but creating an environment that means people will lose a lot to taxes if they structure compensation a certain way will prod people in what has to be a better direction.
I also think financial reforms that separate actual banking from the hedge fund type activities that are essentially legalized gam-bling are a requirement. I don’t care all that much if financial types gamble with people’s money – and the people who gave them that money know they are gambl-ing with it. But when the banks get all mixed up with it and money that shouldn’t have been used for gambl-ing is, that’s a real problem. Banks shouldn’t be casi*nos.
Another problem is our quarterly earnings reports – it creates a very short term way of looking at things. I think it’s Porsche that only reports earnings annually. They say it gives them a longer view. If companies only reported once a year, they might take a longer view of things.
EconWatcher
To me, “too big too fail” is a much bigger deal than executive comp. You’re never going to be able to fine-tune the compensation of private actors through regulation to prevent recklessness and short-term thinking. They’ll always find loopholes, and regulation in this area often has uninteded consequences. Remember, stock-option compensation became so popular in part because Congress limited tax deductions for high executive salaries.
The real issue is, how big will the mess be from recklessness and short-termism–and who will have to clean it up. Right now, “too big to fail” firms have us in a death grip–both because of systemic risks and because of their–how to say this?–particular sway with politicians.
Until something is done about that, we’re going nowhere.
BR
I liked the idea of requiring that all bankers become liable for their company’s earnings, so if it loses peoples’ money, their personal assets are on the line.
Where was this idea suggested? I want to say it was from bonddad’s blog, but I’m not so sure:
http://bonddad.blogspot.com/
mr. whipple
That sounds reasonable, but someone commenting here that sure seemed like they know what they are talking about, said such a separation of existing entities would take years to wind down.
All I know is that I really, really am not looking forward to months of ranting about this next topic.
Keith G
Fuck, I’d rather type about HCR. The FIRE “industry” is …….no, no, I will not go there.
Hey! We are ~ one hour away from the exact winter soltice.
Happy Yule y’all!!
Noonan
I think bonuses are the symptom and not the disease. The government needs to regulate the way these guys go about over-leveraging, mixing commercial and investment banking, and selling bullshit derivatives. If you limit exposure in these areas, you also limit the amount of money these guys are making.
slag
@SGEW:
I love her. But no way will that happen under the current Court. In our wildest dreams maybe.
Violet
Dang, I was moderated. All those gampling mentions, I guess. I’ll try to edit.
I like the idea of taxing the bonuses unless they’re paid over time. I’m not very fond of the government telling people how much they can be paid, but creating an environment that means people will lose a lot to taxes if they structure compensation a certain way will prod people in what has to be a better direction.
I also think financial reforms that separate actual banking from the hedge fund type activities that are essentially legalized gam-pling are a requirement. I don’t care all that much if financial types gamp le with people’s money – and the people who gave them that money know they are gampl-ing with it. But when the banks get all mixed up with it and money that shouldn’t have been used for gampl-ing is, that’s a real problem. Banks shouldn’t be casi nos.
Another problem is our quarterly earnings reports – it creates a very short term way of looking at things. I think it’s Porsche that only reports earnings annually. They say it gives them a longer view. If companies only reported once a year, they might take a longer view of things.
Zifnab
Those would be great rules for a corporate board to develop. But usually the CEO picks the board, and the board passes whatever the CEO wants. Or a handful of interests lead the company around by the nose, looking for the quick payout.
I mean, I honestly don’t know if you can use government reform to keep big businesses in line like that. Businesses aren’t very transparent. They aren’t very democratic. And they are very Republican / Libertarian leaning the farther up the corporate ladder you get, so you’re going to be fighting these guys tooth and nail every step.
I think what really needs to happen is a big drop of the anti-trust hammer. You need to cap how big businesses can get with relation to the size of the market and the general economy. AIG felt fairly invulnerable because it was dealing in trillions of dollars in securities. Merril Lynch bet big because it had hundreds of billions on its balance sheets. The Big 3 auto companies felt they didn’t have to change because they completely dominated the industry. All these companies were victims of inertia brought on by sheer bulk. So they were allowed to make the same mistakes over and over again so long as it paid off some of the time.
I think that’s what broke the system. Being allowed to make the same mistake more than once. And that was a function of size – companies were allowed to buffer themselves against failure or lull themselves into a sense of invincibility.
So risky mistakes small banks and smaller car companies would never dream of became routine because, hey, what’s $1 billion on black really going to hurt on the balance sheet?
PeakVT
What needs to be done is to make the financial sector less profitable. As long as there are big profits, there will be big bonuses.
How do you shrink the financial sector? 1) tax leverage, and 2) put a transaction tax on all types of tradeable instruments at a level high enough to stop churn.
Other things that might make a small amount of difference: Clinton-era tax rates; two additional brackets at 100x and 1000x minimum wage; and make all types of income equal in the tax code.
calipygian
We’re in two wars and we have assinine people like the Warrior Queen of the Idiocracy braying about the sacrifices of the greatest generation.
Bring back 1940s style top tax rates.
Then we’ll see some wartime Greatest Generation sacrifice, and if we’re lucky, the bankstas will run to a tax haven and we can be done with them.
numbskull
An issue that must be addressed is the clubbiness of the boards and CEOs. In theory, the board of directors controls the CEO. They choose who is to be CEO and what the consequences are to a CEO who does well (consequence: a raise and other perks) or who does poorly (consequence: tossed out on his ear with no further compensation).
The reality is that boards are made of up CEOs of other companies. There’s an incentive to never say anything bad about a CEO lest your fellow board members, who happen to be CEOs at other companies, say something bad about you. Conversely, and more to the point, there’s an incentive to board members to support the absolute best compensation package for the CEO of the company on whose board they sit because generally as one CEO compensation package goes up, all CEO packages go up, especially within the same industry.
Neat trick, huh?
A relatively simple solution would be for a federal law to be enacted that disallows board members from being CEOs and vice-versa. Never gonna happen, but it would be simple.
SGEW
@slag: You leave my wild dreams alone. [Yes, some of my wild dreams do, in fact, involve SCOTUS Justices. J. Scalia, in particular, is a recurrent nightmarish character in some of my more feverish dreams. Think of the clown in King’s “It.”]
Shalimar
95% tax on income over $1 million a year. I don’t mind being called a socialist. The difference between the very rich and an average person is frequently the lack of a conscience and willingness to do anything to get ahead regardless of how it affects others. Society should discourage that sort of person, not deify them.
Bill H
Do those bonuses really affect the performance of the financial industry and the well being of the common man? No. Curbing those bonuses accomplishes nothing but the venting of some spleen and the satisfaction of some revenge. Given the difficulty it has passing health care reform, our Congress has far more important things to do than making me happy that some sorry jackass on Wall Street got some money taken away from him, an action that helps me in no tangible way whatever.
It seems like most of the argument that goes on today is wanting the government to punish somebody; the health insurance companies, Wall Street, Iran, terrorists… Go bomb something or take somebody’s money away, or “hold somebody accountable” or some such thing.
How much time is spent screaming to build some bridges, or feed some hungry people, or provide some jobs for people who want to feed their children, or house the homeless. There are al lot of good things that need to be done, and everybody is focused on getting some sort of revenge.
Just Some Fuckhead
@El Cid: Don’t worry about the political possibilities. This is the part of the process where we salivate over the menu before they serve us a shit sandwich.
Jim
@Athenae:
Carly’s Law, for the GOP candidate for Senate?
Matt Yglesias has suggested this is the issue Dems can take a stand on. Force the Republicans to filibuster in defense of Goldman Sachs, and let them and Nelson kill it.
numbskull
Bill H,
I agree that more screaming can be done about positive things like building bridges, etc.
We are have bled and are bleeding an enormous amount of national treasure and people lives were and are being ruined because of huge mistakes made by a relative handful of people in the finance and banking industry. An argument can be made that the reason these mistakes were made is partially due to how these Masters of the Universe are compensated and (un)regulated.
I would like to stop the bleeding and ruination. That this may pinch some of the Masters just a little is not the object of the exercise.
Ann B. Nonymous
Given the current political climate, it’s going to have to be twenty nickel-sized pieces of legislation rather than one silver dollar bullet. Tax code tweaks, transparency about corporate governance, maybe a little bit of the implied threat that has worked so well with the TARP money.
And the transaction tax mentioned earlier should be made anyway. It’ll cut down on froth.
gwangung
@Ann B. Nonymous:
Death from a thousand cuts? Or force the business interests to engage on so many fronts that they can’t compromise all of them?
robertdsc
To me, the entire bonus brouhaha is pointless and stupid. Going after what the bankers are paid makes no sense when the tools they use, CDSs and CDOs among other things, are what the problem is. Once those tools are outlawed, then things can begin to return to normal.
Stefan
Other things that might make a small amount of difference: Clinton-era tax rates; two additional brackets at 100x and 1000x minimum wage; and make all types of income equal in the tax code.
Right now someone who makes, say, $250,000 a year pays more in taxes than someone who makes $25,000 a year. This is fair and just and proper. However, someone who makes $2,500,000/yr, someone who makes $25,000,000/yr, and someone who makes $250,000,000/yr all pay essentially the same rate as the $250,000/yr guy, even though they are compensated out of all proportion to him. We need to open some up daylight at the top end of the income scale and increase tax rates on the highest earners.
Mary
@Shalimar: Raising the marginal tax rate is a huge part of the answer. When Reagan slashed the marginal tax rate, deferral of compensation and long vesting schedules that tended to support a firm’s stability and long-term profitability went out the window. Compensation is now front-loaded to take advantage of low, low marginal rates. Loyalty to the firm is no longer necessary since executives can now make a lifetime killing in 2 or 3 years.
Nazgul35
How’s about investing their bonuses in the “product” that they sell, which they can cash out after ten years.
Roger Moore
@Zifnab:
And that’s not the way it’s supposed to work. What’s supposed to happen is that the stockholders pick the board, the board decides what the company is going to do, and the CEO implements the board’s decision. We need to break the cycle of the CEO naming the board and the board naming the CEO. If we make sure that authority flows from the stockholders to the board to the CEO and not around in circles, most of the worst abuses will end.
Ann B. Nonymous
@gwangung:
Both. It seems obvious to me that we don’t have the votes in the upper house for a knockout punch.
It’s true that this might cause the financial industries to contort themselves in stranger and more baroque ways. Under a less partisan and more principled Supreme Court, this would be self-correcting. But perhaps Justice Thomas might choke on a hair in his soda or something.
KG
Changing corporate rules will likely have to be done at the state level, particularly Delaware. But being that banks can now be formed under federal law, there are a few things the government can do with publicly traded companies. Things I’d do: directors can’t be officers, officer compensation must be voted on by shareholders with no proxy voters. Decoupling investment and lending also makes a lot of sense, as does enforcing antitrust laws (insurance should not have an exemption).
Truth is though, I think a lot of reform will have to happen through the courts in shareholder dirivative law suits and the like.
Roger Moore
@Bill H:
Yes, they do. The enormous bonuses, and more specifically the way those bonuses are structured, are a major reason that the financial industry ran into a ditch and needed to be bailed out before they dragged the rest of the country along for a ride. If we don’t do something about it, we’ll be back in the same ditch in another couple of years.
PanAmerican
Corporate governance and financial system structure are two different issues. There’s some overlap but leave the over simplified bromides to the poutrage set.
Florida Cynic
The idea of realigning board actions more with shareholder interests is probably the biggest single hammer that can be applied to public corporations to address the (over) compensation issue. The other side of the equation is making large, institutional shareholders more interested in the issue. Change the holding period before capital gains treatment kicks in, say 3-5 years instead of the current rules, and I’ll bet a lot of fund managers get more vocal about management pay practices.
mogden
The bonuses are fine, as long as they aren’t from taxpayer dollars. Solution: don’t give taxpayer dollars to Wall Street.
El Cid
@Just Some Fuckhead: Hey! That’s my hopeless escapism you’re mocking there!
Tax Analyst
@#21 robertdsc said:
1. “only outlaws will have tools”
or
2. we won’t have anyone left in Congress.
On the semi-serious side, I believe Great Britain has passed something like a 50% tax on “performance bonuses” paid by companies that received bailout $$.
gwangung
That this aligns with the interests of business types is no reason to reject it, either.
LGRooney
Zifnab, #19 above, gets to the heart of it. In short, break them up. We know that entrepreneurship and competition are drivers of wealth and employment and progress in a capitalist system (the best there still is, as far as I can tell). The ability, however, to concentrate wealth and power into the hands of a few, i.e., creating an oligarchy, will always be detrimental.
I think one of the best ways to put this genie back in the bottle is to re-introduce the interstate banking laws which kept size down, forced banks to be local, and encouraged competition not just in those reduced markets based on state laws but among the states. There was an article a few years back, yes in the heydays of the naughts!, showing how little value was created (and in fact how much value had been destroyed) by the loss of the interstate banking laws.
How about laws (remember those?) that automatically kick in with strong regulations about remuneration (of any variety), competitive practice, and a host of other issues whenever the competitive market is less than 15 publicly-owned corporations? With privately-held companies it obviously becomes trickier and would need to focus on “public good” aspects. With natural monopolies, think about electric lines, computer operating systems, communications systems (communications holding the older, broader definition of roadways, waterways, skyways and means of interpersonal contact across the boundaries of personal space), extremely strict interpretations and regulations are needed.
Enforcement of current, or development of more modern, legal provisions along these lines will help solve the swagger enabled by size that leave the economy so devastated in any given downturn. As for remuneration specific questions…
Since the return on any investment is usually a question of time, how about any bonus paid out in excess of “usual practice” (define that one in a court, ha-ha) and in excess of the time-value of expected return or before any realized return, i.e., not based on realized return, be taxed at rates somewhere north of 75%? That may be enough to ensure people are paid bonuses based on their financial genius and proverbial risk-taking only when said genius and proverbial balls result in someone making actual money.
The problem is that, as the Bush II White House realized all too well – who says W didn’t learn anything in his MBA program at Harvard? – all you have to do is change a definition or two and the whole regulatory/ legal system can be evaded. And, the Wall Streeters are certainly genius at redefining things… if in no other way (and that is how I think of my fellow MBAs as they do little more than fiddle their Rolodexes in boardrooms everywhere).
slag
@SGEW:
Ha! Really? I always kind of saw him as a Leprechaun II type of character. I could just see him riding around the Court on a Big Wheel cackling maniacally. Of course, I could be getting my horror movies mixed up, but the image is pretty specific nonetheless.
Nik
Umm… how is this different than any power structure? Look at the last 10+ years. Republicans were encouraged to do crazy reckless things (Gramm-Leach-Bliley, Iraq, etc) for short-term gains (political power, huge givaways to corporate buddies), and now someone else (Obama) has to clean up the mess.
AhabTRuler
OTOH, and this speaks to the same political processes that make that tax rate possible, Great Britain has also slid even further towards a police state than we have. Kinda what happens when you have all three branches of government in one body. Don’t get me wrong, I have a great deal of respect for the Westminster system, but GB has some serious problems of its own, and one good shot at the Banksters doesn’t undo that.
cfaller96
I’m too lazy to read through the comments to see if this has already been mentioned (sorry), but the only solution I know of to excessive executive compensation is payment by restricted stock (rather than through options or cash or stock immediately available). Restricted stock is payment of regular shares of the company, but the executive is restricted from selling those shares for an extended period of time (e.g. 3-5 years).
Essentially, paying someone in restricted stock forces that person to protect the long(er) term value of the stock and the company itself. As it relates to the banks: theoretically if a trader knew certain types of trading profits were bullshit and would blow up in a year or two, then he would also know that his bonus based on those trading profits would vanish before he could cash in. He would probably not do those types of trades to begin with, which would be a good thing. This is all theoretical, though.
Unfortunately, there’s nothing stopping companies from doing this now…but restricted stock is not a favored form of compensation for public companies, and executives will always fight it (and usually win). So corporate governance reform may be the root action here- unless you take away compensation policy power from the executives themselves, I don’t see a lot changing here.
The Raven
A bad bill will be passed. But don’t worry about it–we’ll fix it in reconciliation.
Croak!
AhabTRuler
@The Raven: I thought the line was “Nevermore.”
Cat G
There are lots of good observations upthread abt some of the reforms that are needed. And yes, bonuses can affect behavior. Wall Street bonuses are structured to incentivize short term risky behavior. In my Fortune corporation, we had bonuses with annual as well as multi-year goals. with rolling payouts. My last contract had part of my bonus based on the performance of the whole company and not just on the performance of the division I worked with because, as my boss said, he didn’t want me to have an incentive to screw over other parts of the company in order to make my numbers…not too much temptation. heh…
Wall Street got exactly the behavior they incentivized…short term performance, friskiness with the balance sheet, eat the seed corn…too much temptation.
Karen
Even after reading, I still think breaking them up, not allowing a commercial bank to become an insurance company (or vice versa) & if they get in the position they were in (going over the cliff), allow them to fail.
If they aren’t as big or as diverse as, say AIG, letting them fail would be a small blip in the radar, instead of a catastrophe in the making. And it would be an example to the others in the same train of thought. As well as protection for the taxpaying public.
The Raven
But wander by The Baseline Scenario where former IMF chief economist Simon Johnson and management consultant & entrepreneur James Kwak have been discussing this for a while. There is some good news, but mostly in the House.
Really, though, I don’t see how anything major is going to pass the Senate at this time. The financial industry has just turned the Senate health care bill into swiss cheese. I don’t see why they can’t do the same to any attempts at other sorts of financial regulation. And I doubt the Roberts Court is going to be any friend to new regulations, though Sotomayor, at least, is a long-time opponent of big business.
And then there’s China.
The Raven
@AhabTRuler: “I thought the line was ‘Nevermore.’ ”
LOL, er, croak-croak-croak.
Martin
@Zifnab:
This.
The compensation is justified by the board on the argument the stakes are so high. But if the stakes are so high that the government is the bailout agency, then the risk isn’t really as high as the board is making it out to be.
Break them up. Total compensation won’t change – you’ll have 8 CEOs each making $1M instead of one CEO making $8M, but the risk behavior will change. It still leaves the problem when the CEO is past the ‘set for life’ tipping point and they have no personal risk based on the outcome of the company. There needs to be a greater individual responsibility of executives to shareholders here. I’d be comfortable if bonuses could be seized even if the executives acted lawfully but not in the long term interests of shareholders. If a bank needs to be bailed out, filed for any degree of bankruptcy (a reasonable list could be constructed), all bonuses earned by executives (past and present) for the previous X years (5, 10?) would need to be paid back to the company. Among other things, it would cause executives to negotiate away from bonuses, which is probably good enough.
Seanly
Does a revolution with rivers of blood flowing in the streets count as reform? Coz I am more & more convinced that only a full blooded second revolution will fix what ails us. Unfortunately, any likely revolution would come from the people who fucked it up in the first place. Things aren’t screwed up as much as they would like so the Tea Baggers are up in arms.
RSA
I don’t know much about economics, but I agree with those who say that the problem is more structural than anything else. Do we worry about small business owners taking too many or too large risks? Not so much, because even if they are completely ruined, it hasn’t brought down the entire economy (even if it’s terrible for them personally). The problem is so many of our eggs being in so few baskets. Banksters may make too much money for what they do, in my personal opinion–it’s always seemed unreasonable to me that of two equally talented and skilled people, one working as, say, an engineer or scientist or whatever, the other working with money, the money guy will almost always be making a lot more than the other, especially when the money guy isn’t necessarily taking on any personal risk. But that’s a secondary issue compared with the idea of banksters taking huge risks that affect us all.
One other thought: What motivates banksters? The usual incentives, of course, the main one being money. But I think that the sheer amount of money makes a difference. Me, I want to make enough to live comfortably. The banksters we’re talking about have enough money saved to live what any normal person would think of as a comfortable life even if they quit tomorrow. I think that their motivation might better be described as greed, whether it’s a matter of keeping up with the Joneses or just wanting money for the sake of money. I know that capitalism is philosophically founded on self-interest, but I wonder whether things break down when the really powerful actors are motivated by something we traditionally think of as being a character flaw.
Sly
@Ann B. Nonymous:
Healthcare and Finance has different politics in terms of regional demographics, which is what drives the Senate. Lieberman aside, the Senate problems with HCR were relegated to the Midwest and some adjacent states. Lincoln, Nelson, Baucus, Conrad, Bayh, and Landrieu were the ones who drove the process to “The Center” (which is a stupid descriptor in anything but geographical terms). They don’t have the same agenda vis-a-vis HCR that they do with Financial Reform.
We’re not talking about spending bills here, so the fiscal hawks (who are not fiscal hawks, but w/e) don’t have a leg to stand on. Eastern Democrats, the ones with the biggest ties (aside from Republicans) to large financial concerns are already on board. Both Dodd and Schumer are up for reelection in 2010, and both have been targeted for blame in the housing meltdown and the banking crisis (and unfairly targeted, in large part, I would argue). They’re the ones with the most skin in the game, and protecting banks will make them look really, really bad. Especially for Schumer, because I bet he really wants to be Majority Leader some day.
Lieberman will probably balk at compensation and severance reform, being that he’s typically been against both his entire career. As an example, he voted against a provision that required the reporting of the costs of stock options as expenses in the late 90s. A policy that would have limited the Enron scandal (management of Enron was largely compensated through options, which gave an extraordinary incentive to management to focus on stock price for their own enrichment). So we’re likely not done hating on Holy Joe.
Frankly, though, I think intrinsic distrust of banks will push a reasonably good reform package through. It did in the House, even after the Blue Dogs and New Democrats tried to join forces and kill it.
R. Johnston
The proper way to structure bonuses is as indexed purchase options that can’t be exercised for at least five years. The exercise price on the option would be the year end price in the year of issuance or the average price over the previous year, whichever is higher, indexed according to industry average changes in stock prices or changes in the S&P, again whichever results in the greater option exercise price. Throw a 5% surcharge or so on top of that. If you don’t do distinctly better than industry and broader market average for five years following receipt of your bonus, your bonus is worthless.
This is still imperfect, because even doing distinctly better than average is almost entirely due to luck and isn’t something that should be rewarded. There is, in reality no such thing as a brilliant financial company executive, or at least no way to distinguish the truly rare beast, if it exists, from those who succeed due to dumb luck. Under socially and economically optimal conditions the lords of finance would be boring salaried technocrats making perhaps $400,000/year at the very top of the scale. Still, that’s not a reality our government is even close to willing to acknowledge, much less impose, and the best we can hope for is to force bonuses to reflect medium-term-future performance rather than past dumb luck.
Chuck Butcher
There were reasons beyond federal income for the high marginal tax rates of days gone by. I think everybody here knows that a 90% rate (or whatever) only kicked in on the dollars above a certain income. It did help discourage the quest for that last gazillion dollars.
The stupidity of tax law was that it set at dollar rates rather than something like a multiple of something like median income.
Since it isn’t “fair” it isn’t going to happen. I don’t know what kind of educational campaign it would take to make it clear that 90% only kicked in on the $1 above, say, $10M total. I wonder if people understand the consequence to behavior with the tax rate topping out at as low an income at it does.
Lex
@mr. whipple:
Well, let’s get started then.
Effectively, the appropriate legislation, although I’m not a lawyer, wouldn’t have to say much more than, “The (whatever the name of the bill was that repealed Glass-Steagall) Act of 1999 is hereby repealed.”
But we need to do this. Hell, Paul Volcker says we need to do this. If you don’t trust me, you still can probably trust him.
Lex
@Bill H:
Actually, some of us are focused on trying to find a way of paying for those good things so that they can get done. Taxing very high incomes (particularly given the current, historically high upward concentration of wealth), and taxing high income derived from systemically risky behavior in particular, can help do that.
Gotta Ask Why
@ Doctor Gonzo
+ 1
… and to add. I have yet to come across anyone who can explain how the over-securitization brought on by the financial “innovations” of the last 10 years has improved the lives of any other person, place or thing than the investment banks.
Finance / Wall Street used to be a way for large numbers of people to pool their knowledge together to increase the amounts of capital that flowed to good companies and decrease the amounts that flowed to bad companies. Buying a derivative of a derivative of a derivative of a bunch of mortgages initiated by a fly-by-night mortgage broker is not at all different from going to Vegas in that the deal is only a good deal if you’re the house.
liberal
We don’t need to. What we need to do is emasculate the FIRE sector. It’s a massive, parasitic, rent-collecting rathole. IIRC you (John Cole) yourself pointed out some numbers about the fraction of GDP going to FIRE, or perhaps the fraction of corporate profits.
After the sector is emasculated, total pay will go down, as will (hopefully) total employment in the sector.
liberal
@Chuck Butcher:
That’s an important point, but it’s also important to note that the definition of taxable income (what I guess is called AGI these days) has varied a lot. That can have a big impact on effective tax rates.
liberal
@Sly:
Would that it were so.
liberal
@RSA:
I don’t have a specific reference on hand, but I think the point is that in terms of a need for regulation, the financial sector is just completely distinct from other sectors.
liberal
@Karen:
While I think “big is bad,” I think complexity is a huge part of the problem. Various commenters on the financial blogs I read, who typically have a software or engineering background, have pointed out that the system is set up so that failure spreads rapidly. The CDS system is a particularly insane version of this.
So, the conventional wisdom is that all the interconnectedness in the financial sector was good, because it “spread risk.” They had that right, but not in the sense they intended.
liberal
@cfaller96:
Well, some people (Michael Lewis?) claimed that if some of the banks (at least the investment banks) went back to being partnerships, they’d be much more risk averse.
erinsiobhan
I don’t care about the bonuses. The bonuses are a distraction from the real work of separating the critical functions of providing credit to individuals/businesses from the rampant speculation and gambling of investment banks. I don’t care if financial institutions want to give multi-million dollar bonuses to the most successful speculators in their employ. I just don’t want THOSE financial institutions to be the ones that are also responsible for keeping the flow of credit open.
The system failed because these institutions couldn’t cover their bets. Split them up.
liberal
@robertdsc:
I agree. If we eliminate enough of the tools—which don’t appear to help the financial sector with its socially useful task (capital allocation)—then as a secondary effect compensation will be a lot lower anyway, because there’ll be much less economic rent to divy up.
liberal
@Jim:
But the problem is that servility to Wall Street is one of the issues for which there really isn’t much difference between the parties.
liberal
@Bill H:
Bullcrap. Backstopping the banksters and their bondholders doesn’t come for free. Those are dollars that aren’t going to good use. And we’re talking big, big, big money here.
liberal
@calipygian:
Martin
I don’t think you can say that definitively. In fact, I think we could come up with circumstantial evidence that you are wrong.
The bottom line is ‘what motivates executives in their decision making’. Why did every major bank get involved in a financial scheme that anyone who has traded options could recognize leads to distorted outcomes? Let’s not pretend that executives function out of some kind of moral conviction here. That’s not to say that they are amoral, but they aren’t volunteering for this job either. It’s a job – and we all act on a mishmash of risk/reward, self-interest, and moral conviction.
The bonus situation very severely tilts the risk/reward and self-interest calculations toward risk taking. The only way the bonuses show up is when the numbers come in big. If the numbers come in small, they generally don’t lose their jobs. Hell, how many executives lost their jobs for encouraging this mess? It could work with the bonus situation if there was a sufficient cost to screwing up – one of equal magnitude to the bonus. It’s not enough to reward a good outcome, you need to punish a bad one. This is just human nature – it applies everywhere – just ask the military.
So yes, I would argue that based on the results of the bank fiasco, Enron and the energy crisis from a half decade ago, Worldcom, the S&L crisis from the 80s, and the dozens and dozens of other complete financial failures that can be traced back to behavior of people earning bonuses, that it does affect the common man.
Martin
@liberal:
And not just the bankers. California got assraped for a few weeks while Enron decided to suck money out of us on the energy market. Health insurance and health care (Pharma in particular). Halliburton. There are lots of industries where big dollars lead to big consequences for the general public.
At its root is virtual immunity for executives who approve these actions without consideration of the effects of the public. If the worst they face is the SEC or FDA slapping them on the hand and saying ‘stop’, or fining them 1/3 of the profits they earned under the scheme, then there is no consequence to their actions. Do you think Exxon executives, at this point in time, have learned anything from Valdez other than bad PR is bad? Has it personally affected anyone who approved single over double hulled tankers? Anyone who said ‘maybe we don’t need so much oversight over our tanker captains – after all, it cuts into profits’?
When corporations are small, their ability to do harm is somewhat limited. Offering executives some degree of protection is good in the sense that you don’t want every GM CEO hauled into court every time someone is too lazy to put their seat belt on and dies. But it’s also providing immunity when they approve decisions such as bundling up bad debt with good in order to hide the bad debt, and setting up these options schemes that they know are likely fail so that they can write as many bad loans as they desire. They can’t be able to hide from problems of that size – that’s what needs to change, and not just for the banks.
Do that, and the bonus situation solves itself.
R. Porrofatto
Remember 2008, when the banks caused the global recession? According to a report released by the NY Attorney General (pdf file here — warning, not for the hypertensive), last year nine banks that received government money paid out bonuses of $33 billion.
More fun tidbits:
– Citigroup and Merrill Lynch suffered massive losses of more than $54 billion, paid out nearly $9 billion in bonuses and then received TARP bailouts totaling $55 billion.
– Six of the nine banks paid out more in bonuses than they received in profit.
– Overall compensation at these nine banks amounted to $150 billion.
– The nine firms in the report had combined 2008 losses of nearly $100 billion.
– This year the bonuses are estimated to be 40% higher.
But listen, folks, it’s not just banks, it’s ALL of Wall Street, and the problem isn’t $40 billion in bonuses, it’s that they have $40 billion to dispense in bonuses in the first place. There was a time when $10 billion in profit was a good year for the ENTIRE U.S. auto industry. Wall St. is the most destructive force in our economy, from the private equity vultures who saddled companies with huge debt while not risking a dime of their own capital (see Simmons, demise of), to the commodities hucksters and stock pimps and other leeches. The myth that Wall Street is the engine of entrepeneurialism and progress should have died with the dot.com bust. Too much of the nation’s assets, profits, and productivity are burned in order to buy yachts and a ninth house for mere handfuls of people who really, really don’t deserve them.
AlanDownunder
Why be piecemeal? A return to Eisenhower-level tax rates would be useful.
Specifically address bankers’ remuneration by addressing the banks that are doing the remunerating. Put a pin in the inflated financial sector.