The Wonk Room

Fed Releases Guidelines For Bank Compensation — Will They Do Any Good?

Today, on the same day that the administration’s special master for compensation placed significant pay restrictions on the seven companies under his watch, the Federal Reserve released new guidelines regarding compensation practices at all banking organizations.

“Compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability,” said Federal Reserve chairman Ben Bernanke. “The Federal Reserve is working to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system.” According to the Fed, compensation practices should:

- Provide employees incentives that do not encourage excessive risk-taking beyond the organization’s ability to effectively identify and manage risk;

- Be compatible with effective controls and risk management; and

- Be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

The guidelines apply to all banks, including regional and community banks, but the Fed will give special scrutiny (and require detailed descriptions of current practices) to 28 “large, complex banking organizations.”

The New York Times noted that the Fed’s principles “are less strict than plans suggested by some European leaders and some members of Congress. They do not impose caps on pay or prohibit multimillion dollar pay packages.” But more than that, they are simply devoid of specifics, and have no teeth behind them. So long as the banks make an attempt to conform with the principles above, it seems like the Fed will be willing to give them a pass.

Remember, as of late the Fed has been scrambling to issue various sets of guidelines, in an attempt to prove it’s taking regulatory reform seriously, as Democrats in Congress advance legislation stripping the Fed of some of its regulatory functions. This could easily be about symbolism, with little intention of following through on the substance.

One interesting aspect of the proposal, though, is that the Fed is soliciting comments on whether “formulaic limits [for compensation] be adopted for some or all banking organizations”:

[Some] have suggested consideration of an approach in which at least 60 percent of all incentive compensation received by senior executives of all large, complex banking organizations be deferred and at least 50 percent of incentive compensation be paid in the form of stock, options, or other equity-linked instruments. Would such formulaic limits on determining and paying incentive compensation likely promote the long-term safety and soundness of banking organizations generally if applied to certain types or classes of executive or nonexecutive employees across all or certain types of banking organizations?

I think the answer is undeniably yes, deferring payment is a smart move, so that pay is linked to the longer-term health of a firm (assuming the length of deferment is long enough to accurately determine how well a banker’s bets are paying off). And if a formula is indeed adopted, the Fed’s proposal will suddenly look a lot better.

CNBC: Paymaster Must Make Pay Comparable ‘Across The Industry’ Or Bankers Will Go Work At The DMV

Today, Kenneth Feinberg, the administration’s special master for compensation, plans to announce that the seven companies under his office’s watch must cut pay packages for their top 25 executives by about 50 percent, including a 90 percent reduction in cash salary. Feinberg also plans to “curtail many corporate perks, including the use of corporate jets for personal travel, chauffeured drivers and country club fee reimbursement.”

An executive at one of the seven companies told the Wall Street Journal that “the terms came as a shock,” and that the restrictions “were clearly much worse than what had been anticipated.” And of course, CNBC, which never hesitates to defend bailed-out bankers and their sky-high bonuses, went to bat for the banks once again, arguing that Feinberg should make pay comparable “across the industry,” lest some bankers take such exception to their pay cuts that they go work at the DMV. Watch it:

CNBC also managed to blame the falling value of the dollar on Feinberg’s decision. But if Feinberg really applied compensation levels comparable to other Wall Street banks, his restrictions would be rendered moot, as Wall Street pay is headed for a record high this year, eclipsing the previous highs from 2007. (For the record, the average DMV employee makes $35,000 per year.) Goldman Sachs alone has already set aside $16.7 billion for compensation.

And this gets at the limitations of the administration’s action. While I think it is entirely appropriate that Feinberg crackdown on the pay at these seven companies, they represent only the tip of the iceberg when it comes to problems with Wall Street’s pay structures.

As Nomi Prins wrote, “by simply tying compensation caps to the TARP program (a year late), Feinberg and the Obama administration are completely ignoring the rest of the $14.6 trillion federal bailout and subsidization of the banking industry, which has helped propel many key banks to 2007 levels of compensation, unfettered.” And as evidenced by Goldman Sachs analyst Brian Griffiths’ comment yesterday that we must “tolerate” income inequality “as a way to achieve greater prosperity and opportunity for all,” Wall Street doesn’t seem too interested in changing things on its own.

The Fed took a step towards reform today, seeking comment on compensation formulas that would defer payment over a longer-term. Indeed, what has to happen — by regulation if necessary — is that a large percentage of any particular pay package needs to be tied to the long-term performance of the firm. This, along with a resolution authority that ensures that banks can fail without bringing down the rest of the economy, will correctly align incentives going forward, and hopefully help to prevent another situation in which Wall Street bankers run to the federal government for aid and then use that aid to line their own pockets.

Goldman Sachs Analyst: Income ‘Inequality’ Will Lead To ‘Prosperity And Opportunity For All’

Last week, the Wall Street Journal reported that Wall Street banks are on pace to pay out a record $140 billion in compensation this year. “Workers at 23 top investment banks, hedge funds, asset managers and stock and commodities exchanges can expect to earn even more than they did the peak year of 2007,” the Journal found.

The New York-based investment bank Goldman Sachs has “set aside $16.7 billion for compensation and benefits in the first nine months of 2009,” which is a 46 percent increase from last year. But according to a Goldman adviser, Wall Street’s record pay is necessary “to achieve greater prosperity and opportunity for all”:

A Goldman Sachs International adviser defended compensation in the finance industry as his company plans a near-record year for pay, saying the spending will help boost the economy. “We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all,” Brian Griffiths, who was a special adviser to former British Prime Minister Margaret Thatcher, said yesterday at a panel discussion hosted by St. Paul’s Cathedral in London.

At the same time that Wall Street’s pay has skyrocketed, pay cuts in other sectors “are occurring more frequently than at any time since the Great Depression.”

While record bonuses may indeed spur spending on million dollar apartments in New York City, the growth in Wall Street pay — and the growing share of national income that is going to the richest Americans — has not translated into shared prosperity. Consider, “back in 1985, the average annual salary for all workers across the country was actually a bit higher than the average [Wall Street] bonus ($19,000 to $13,970),” but “while the average bonus soared almost 14 times higher (by 2006), the average salary has essentially been stagnant sine the mid-1980s.”

Plus, Goldman Sachs is only able to make its current profits ($3.19 billion last quarter) — and thus pay huge bonuses — because of government programs aimed at reviving the economy, which allow the company to make “big bets using cheap dollars.” As Simon Nixon wrote, the profits “aren’t the due rewards for exceptional skill but gifts from taxpayers.”

Most Main Street Pay Cuts Since The Great Depression Coincide With Record High Wall Street Pay

A lot of the discussion regarding the health of the economy has centered on the unemployment rate of 9.8 percent. But the economic crisis is not only affecting those who have lost their job. As the New York Times reported today, “pay cuts, sometimes the result of downgrades in rank or shortened workweeks, are occurring more frequently than at any time since the Great Depression”:

The Bureau of Labor Statistics does not track pay cuts, but it suggests they are reflected in the steep decline of another statistic: total weekly pay for production workers…representing 80 percent of the work force. That index has fallen for nine consecutive months, an unprecedented string over the 44 years the bureau has calculated weekly pay, capturing the large number of people out of work, those working fewer hours and those whose wages have been cut. The old record was a two-month decline, during the 1981-1982 recession.

However, things are looking up on Wall Street, where “major U.S. banks and securities firms are on pace to pay their employees about $140 billion this year — a record high”:

Workers at 23 top investment banks, hedge funds, asset managers and stock and commodities exchanges can expect to earn even more than they did the peak year of 2007, according to an analysis of securities filings for the first half of 2009 and revenue estimates through year-end by The Wall Street Journal. Total compensation and benefits at the publicly traded firms analyzed by the Journal are on track to increase 20% from last year’s $117 billion — and to top 2007’s $130 billion payout. This year, employees at the companies will earn an estimated $143,400 on average, up almost $2,000 from 2007 levels.

So it seems as if the worry that Wall Street compensation would climb back to 2007 levels were misguided — pay is, in fact, set to eclipse the 2007 highs. Financial firms told the Journal that “they need competitive pay packages, pointing to threats from non-U.S. companies, private-equity firms and hedge funds.” A Goldman Sachs spokesman said that “the easiest way to destroy the firm would be if we didn’t pay our people….Destroying a profitable enterprise would not be in anybody’s interest.”

Of course, I don’t know that it’s in anybody’s interest — save for the bankers themselves — to have a return to pre-crisis pay. But most insulting about this resurgence in pay is that Wall Street’s return to profitability has been driven, at least in part, by “the continuing effects of various government aid programs.” And while the administration’s “pay czar” has the ability to regulate pay packages at the seven companies still receiving extraordinary pay, there is nothing in place to rein in the rest of Wall Street, even as benign a measure as “say-on-pay,” which would mandate that shareholders hold a non-binding vote their companies pay packages.

Simply put, this is another example of the government’s extraordinary efforts to rescue Wall Street putting recovery there on a much faster timetable than everywhere else — and without the regulatory reform designed to remedy Wall Street’s ills being in place.

Bank Of America’s Sallie Krawcheck: It Would Be ‘Stupid’ To Change Merrill Lynch’s Pay Practices

In the wake of Bank of America CEO Ken Lewis’ sudden retirement last week — effective at the end of the year — there is a lot of speculation about who the next CEO will be, particularly since he or she will likely inherit a firm that still owes the government $45 billion from the Troubled Asset Relief Program (TARP).

One of the candidates being mentioned as a possible successor to Lewis is Sallie Krawcheck, the head of Bank of America’s wealth-management unit. That position, which Krawcheck moved into two months ago, now comes complete with the honor of overseeing Merrill Lynch, the troubled investment broker that BofA bought in the midst of the economic crisis.

In an appearance yesterday on CNBC, Krawcheck was asked whether she intends to change compensation practices at Merrill Lynch, an idea which she derided as “stupid,” because she wants to “honor the culture” at Merrill:

The first line of being a successful manager is don’t do stupid things. And so, trying to go and change the compensation — I’ve heard we’re going to try and smash U.S. Trust and Merrill together — we’re not doing any of that stuff. What we want to do is bring these great capabilities that we have to clients, [and] honor the culture…The industry always tinkers with compensation on the edge. For the industry, it’s sort of an annual ritual.

Watch it:

But maybe Krawcheck should take a closer look at what went on at Merrill, before its implosion, because the culture regarding pay doesn’t seem like something worth holding onto. As New York Attorney General Andrew Cuomo’s office pointed out, “large payouts became a cultural expectation” at Merrill Lynch, even when the company tanked:

[A]s Merrill Lynch’s performance plummeted, Merrill severed the tie between paying based on performance and set its bonus pool based on what it expected its competitors would do. Accordingly, Merrill paid out close to $16 billion in 2007 while losing more than $7 billion and paid close to $15 billion in 2008 while facing near collapse. Moreover, Merrill’s losses in 2007 and 2008 more than erased Merrill’s earnings between 2003 and 2006. Clearly, the compensation structures in the boom years did not account for long-term risk, and huge paydays continued while the firm faced extinction.

700 Merrill employees received bonuses of $1 million or more in 2008. The Wall Street Journal also pointed out that “the second largest Wall Street bonus of 2008…was the $39.4 million paid out to Thomas Montag,” Merrill’s head of global sales and trading. Montag’s unit “piled up the brunt of the company’s $15.31 billion net loss in the fourth quarter of 2008,” which “forced taxpayers to shell out an additional $20 billion to Bank of America to make sure its $50 billion acquisition of Merrill closed in January 2009.”

Of course, BofA is one of the companies whose pay packages are subject to review by the Obama administration’s “compensation czar,” Kenneth Feinberg, who may have a different feeling regarding whether Merrill’s compensation culture is worth preserving.

Where Exactly Is Bernanke On Compensation Reform?

Today, Federal Reserve Chairman Ben Bernanke appeared before the House Financial Services committee to comment on a whole host of regulatory reform issues, including the Fed’s newfound motivation to regulate compensation at financial institutions. During the hearing, Bernanke tried to drive the point home that the Fed is taking compensation reform very seriously:

As you may know, the Federal Reserve is about to issue guidance for comment on executive compensation, which will apply not only to the top five or ten executives, but way down into the organization, day-traders or anybody whose activities can affect the risk-profile of the company. And we view this as a “safety and soundness” issue.

Watch it:

At least rhetorically, Bernanke is hitting all of the right notes, and if the Fed’s actions matched his words, I’d be feeling pretty good about the prospects of getting compensation at financial institutions back in line. But then, the Financial Times reported today that the U.S. bank regulators, including the Fed, plan to “take a flexible approach to interpreting global guidelines on bankers’ bonuses” that were settled on at the G-20 meeting last week:

[T]he US is sticking to its belief that one-size-fits-all requirements do not make sense. The Fed’s view is that banks – subject to supervisory review – should be able to choose how to meet the test that compensation schemes should reward risk-adjusted performance and not encourage excessive risk-taking.

So on the one hand, Bernanke sounds gung-ho about reform, but on the other, the Fed admits that it will leave the ultimate decision on compensation up to the banks themselves (unless the “supervisory review” is especially rigorous).

But can we really count on self-regulation? Remember, this comes at a time when we’re seeing short-term incentives increase in executive pay packages, and Wall Street banks return to handing out guaranteed bonuses. And according to a University of Southern California Marshall School of Business survey, “while many directors think executive pay is a problem elsewhere, an overwhelming majority say it’s not at their own firms. Eighty-six percent said their own CEO’s compensation plan was ‘effective or ‘very effective.’”

“It’s nice to see the Fed make a play at populism,” said Rep. Dennis Kucinich (D-OH). “It’s just I would suggest that it’s an ill-fitting suit.” Indeed, I still feel that most of the steps that the Fed has taken in recent weeks — from promising to regulate subprime lenders to Bernanke’s assertions on pay reform today — are meant to head off Congressional action (by providing assurances that past missteps won’t be repeated), but won’t amount to significant changes in the long-term.

Rep. Bachus: Regulating Wall Street Pay Would Be ‘Abandoning A Model That’s Worked For America’

Today, the Wall Street Journal reported that the Federal Reserve is crafting a proposal to significantly step-up its regulation of Wall Street compensation practices. According to the Journal, the proposal would allow the Fed to “reject any compensation policies” it believes encourage bankers to take too much risk. The Fed “wouldn’t set the pay of individuals, but would review and, if necessary, amend each bank’s salary and bonus policies to make sure they don’t create harmful incentives.”

Though the Fed’s proposal is still weeks away from being finalized, it has already provoked quite the reaction from the right-wing. Rep. Spencer Bachus (R-AL), the ranking member on the House Financial Services Committee, was asked about the policy shift on CNBC today, and claimed that the very notion of regulating Wall Street pay means “abandoning a model that’s worked for America”:

We all know there were compensation practices that created incentives for executives to take outsized risk. Having said that, why are we abandoning a model that’s worked for America? We’ve got the largest economy in the world, it’s over three times larger than the Japanese economy and we didn’t get that by government micromanaging companies and setting compensation.

Watch it:

The notion that Wall Street’s reckless compensation structures, which incentivized short-term risk taking over long term financial viability, worked well is ridiculous. And even Bachus couldn’t really bring himself to defend Wall Street, spinning off into a defense of capitalism itself, as opposed to “so-called utopian society.” But James Hamilton at Econbrowser laid out exactly how Wall Street’s perverse pay structures cause systemic problems:

Suppose that in 2005, the individuals who were putting together securities derived from subprime and alt-A mortgage loans could have known, with perfect foresight, events that were going to unfold in 2008. Would they have still done the same things they did in 2005? My concern is that, for many individuals, the answer might be “yes”, insofar as they were richly rewarded personally in 2005 for making exactly the decisions they did. It was other parties (namely you and me) who later down the road were forced to absorb the downside of their gambles

As for this particular proposal from the Fed, I think it’s yet another instance of the Fed promising far too little, far too late, and expecting the last crisis to be water under the bridge so long as it vows to do better next time. As Yves Smith put it, “the ideas on the table suggest any moves will [be] directed at the most extreme practices, simply to curry the image that the Fed is Doing Something.” The Fed has already shown that many of its regulatory responsibilities get shunted down the list of priorities — or outright ignored — when times are good, so I’d prefer that something other than Fed promises be the basis for regulating Wall Street’s compensation.

U.S. Companies Increasing Short-Term Incentives In Pay Packages

Reuters reported today that the Obama administration’s pay czar, Kenneth Feinberg, is starting to evaluate the compensation contracts of the seven firms receiving extraordinary government support — which are the firms his office oversees — and said yesterday that he is willing to “claw back” bonus money that is already paid out.

That’s all well and good, but a new study shows that concerns over a return to perverse pre-crisis pay structures need to go much further than those seven companies. As Gretchen Morgenson reported, “a study of changes made in pay practices by 191 of the nation’s largest companies this year shows that where pay is concerned, enlightenment remains a long way off“:

The study was conducted by James F. Reda & Associates, an independent compensation consultant in New York, and it looked at proxy filings issued by almost 200 companies in the first half of 2009. The firm analyzed changes these companies made to their pay plans that take effect this year. [...] Instead of seeing a greater reliance on long-term incentive programs, the Reda report found that changes in these companies’ plans made short-term incentive pay a bigger part of the compensation pie. Let me say that again: The plans — despite the calamities that short-term profiteering has visited on our economy — made short-term incentives a bigger component of compensation.

“If you were going to encourage long-term thinking and behavior, you would reduce short-term pay, but companies have in fact reduced the long-term programs,” Reda said. “This is counter to the direction suggested by the United States Treasury, academics and other expert advisers regarding ways to mitigate risk.”

This is obviously most problematic at financial firms, where short-term incentives lead to excessive risk taking, which, as we’ve seen, can lead to economic calamity. Bloomberg reported today that France is considering an outright ban on guaranteed bonuses of the sort that are creeping back onto Wall Street. While nothing being considered in the U.S. goes quite that far, the House did pass a bill that would give bank regulators the ability to review the structure of pay packages at financial firms, to encourage a move towards long-term incentives.

In the Financial Times, Lucian Bebchuk made the case for giving regulators such power:

Outside the financial sector, government intervention should indeed be limited to improving internal governance, leaving choices over pay structures to shareholders and the directors elected by them. But financial institutions are special, and their special circumstances warrant a broader role for government. Regulation of pay in financial institutions is justified by the very same moral hazard concerns that provide the basis for existing regulation of the sector.

The proposal on the table in the House would not cap amounts, but the knowledge that a regulator could veto a pay package’s structure might make Wall Street banks think twice about pumping up short term incentives. Of course, the regulators would actually have to follow through on the threat to nix packages, but if they did, this could be a welcome regulatory change.

Guaranteed Bonuses Return To Wall Street

It’s already been reported that Wall Street banks are getting back to their pre-crisis compensation practices. But the New York Times added another wrinkle to the story today, noting that some banks — including those ostensibly owned by the U.S. government — are “reviving the practice of offering ironclad, multimillion-dollar payouts — guaranteed, no matter how an employee performs”:

For a short time, banks had stopped offering guarantees, after the financial crisis turned their profits into losses and as Washington began to scrutinize their use of public money. But now, with banks apparently rebounding after two consecutive profitable quarters, some have resumed the practice, arguing that such bonuses are needed to attract and retain top performers.

The usual suspects — Goldman Sachs, JPMorgan Chase and Morgan Stanley — are back to offering guaranteed bonuses, but so are Citigroup and Bank of America, the financial behemoths still living off of government bailouts.

The problem with a guaranteed bonus is that it is completely unhinged from any sort of performance metrics. With no serious downside, the bankers are encouraged to go all-out in search of profits, as going bust entails little personal financial risk. “Is Wall Street again going to overpromise, and then when the market turns down, we’ll have another set of pay problems?” asked Alan Johnson, a pay consultant who specializes in financial services.

In a report released last month, New York Attorney General Andrew Cuomo revealed just how disconnected bank bonuses are from the performance of those who receive them. “Two firms, Citigroup and Merrill Lynch suffered massive losses of more than $27 billion at each firm [in 2008],” Cuomo wrote. “Nevertheless, Citigroup paid out $5.33 billion in bonuses and Merrill paid $3.6 billion in bonuses. Together, they lost $54 billion, paid out nearly $9 billion in bonuses and then received bailouts totaling $55 billion.”

If the complete failure of a firm is not enough to alter employee pay, then what is? As the Miami Herald’s editorial board wrote yesterday, “it’s time to bring a measure of common sense to the realm of executive compensation”:

Before adjourning for the August recess, the House passed a measure that puts new constraints on executive pay, enabling regulators to ban payments that produce “perverse incentives” to take risks that could damage the financial system. Think high-risk mortgages, the kind that brought down the housing industry. The Senate should follow suit when it returns to work next month.

As Lucian Bebchuk wrote, “regulation of pay in financial institutions is justified by the very same moral hazard concerns that provide the basis for existing regulation of the sector.” However, there have thus far been no indications from the Senate that the bill will do anything but languish. But maybe the stories emerging about Wall Street’s return to the status quo will change some minds?

With CFPA Delayed, House Republicans Now Trying To Slow ‘Say On Pay’

Last week, House Financial Services Chairman Barney Frank (D-MA) delayed markup of legislation creating a new Consumer Financial Protection Agency (CFPA). Prior to the announcement of the delay, House Republicans Jeb Hensarling (R-TX) and Ed Royce (R-CA) had threatened a “barrage of amendments” to slow down the bill’s progress.

With CFPA not moving until September, the next item on the financial regulation docket is reforming executive compensation practices, particularly a provision known as “say on pay,” which would ensure that shareholders receives a vote on their company’s executive pay practices. But Republicans on the committee want this markup to wait as well:

In a letter on Friday, Republicans on the committee sought to delay the markup and votes on the bill, arguing that there has not been a hearing on the issue since the bill was introduced…The letter, signed by every committee Republican except Rep. Ron Paul (Texas), notes that 20 percent of the committee’s members are new and should be given more time to review the legislation.

This is weak tea from the committee members, considering that Frank introduced the legislation eleven days before the markup, and the draft that Frank introduced is based on the administration’s approach to compensation reform, which was released more than six weeks ago. In fact, MarketWatch reported that “the provision giving shareholders a say on top executive compensation is substantially similar to a measure the House approved in 2007.” So there’s been ample time for members to figure out what’s going on.

As The New York Times editorial board noted today, “the bonus-driven risk culture is reasserting itself now” on Wall Street, and thus there is ample reason for “fast-tracking the issue” of reforming compensation. Indeed, the Wall Street Journal reported earlier this month that Wall Street firms are already boosting compensation packages back to pre-crisis levels. After raking in big profits last quarter, Goldman Sachs and Morgan Stanley have “allocated a big chunk” of their revenues for compensation.

Perverse risk-taking, spurred by the way in which Wall Street designed its pay packages, contributed to the economic mess that we’re in, yet we have Wall Street revving itself back up while financial regulation legislation of all kinds languishes in Congress. It’s undeniable that further reform is necessary to better align compensation packages with the long-term viability of a firm, but “say on pay” has been successful in keeping executive compensation in other countries from skyrocketing like it has in America, and in keeping executives more accountable to the shareholders they serve. With executives now receiving one-third of all the pay in America, some more accountability is sorely needed.

Republicans, though, seem more interested in obstructing anything that moves in Congress these days. “We have accommodated one delay already,” said Steve Adamske, Frank’s spokesman. “They don’t want to vote on executive compensation.”

Executives Receive One-Third Of All Pay In The U.S., But Congress Is Still Afraid Of A Surtax

The New York Times reported today that Democratic leaders, “bowing to unease among lawmakers and governors in their own party,” are reconsidering the House Ways and Means committee’s proposal to implement a surtax on the richest one percent of Americans as a way of financing a portion of health care reform.

There has indeed been a lot of pushback against the surtax proposal, which prompted Speaker of the House Nancy Pelosi (D-CA) to suggest that only households making more than $1 million should be subject to it, instead of the graduated scale starting at $350,000 that Ways and Means proposed.

But those feeling squeamish about the tax should take a look at this analysis in the Wall Street Journal, which shows how big a slice of the income pie the rich are currently receiving:

Executives and other highly compensated employees now receive more than one-third of all pay in the U.S., according to a Wall Street Journal analysis of Social Security Administration data — without counting billions of dollars more in pay that remains off federal radar screens that measure wages and salaries. Highly paid employees received nearly $2.1 trillion of the $6.4 trillion in total U.S. pay in 2007, the latest figures available. The compensation numbers don’t include incentive stock options, unexercised stock options, unvested restricted stock units and certain benefits.

In the five years ending in 2007, earnings for American workers rose 24 percent, while the highest-paid saw a 48 percent increase. So as Kevin Drum noted, “in other words, the executives got a 48% increase, the rest of us got approximately nothing, and it all averaged out to 24%.” And to top it all off, median pay raises for this year and next are set to be the lowest in decades.

Income growth in America for the last few decades has been overwhelmingly concentrated at the top. Between 1979 and 2006, the inflation-adjusted after-tax income of the richest 1 percent of households increased by 256 percent, compared to 21 percent for families in the middle income quintile. According to the Center on Budget and Policy Priorities, households in that richest one percent “had $617 billion more income in 2006 (or $656 billion more if measured in 2009 dollars) than they would have had if the 1979 income distribution still prevailed.”

Increasing taxes on this small percentage of people — who have done very well for a very long time — would raise revenue to put toward health reform, which is the single biggest problem for America’s bottom line. As Sen. Bernie Sanders (I-VT) said, “it certainly is okay for me to tell my friends on Wall Street, who just got a bonus of $600,000, they’re going to pay more in taxes so we can lower health care costs in America.”

Is Wall Street Compensation Already Headed Back To Pre-Crisis Levels?

According to analyst estimates that the Wall Street Journal has been examining, Wall Street bankers may be getting ready to party like it’s 2007 when it comes to compensation:

Based on analysts’ earnings forecasts for 2009, Goldman Sachs Group Inc. is on track to pay out as much as $20 billion this year, or about $700,000 per employee. That would be nearly double the firm’s $363,000 average last year, and slightly higher than the $661,000 for the average Goldman employee in fiscal 2007…Morgan Stanley, the only other huge U.S. securities firm left as an independent company, will likely pay out $11 billion to $14 billion in compensation and benefits this year. [...] [T]he comeback in compensation so far this year shows how hard it is for Wall Street to break its old habits.

Meanwhile, over at Tech Ticker, House of Cards author and former investment banker William Cohan said “there’s been a lot of talk” from the Obama administration about compensation, “but little or no action.” “There’s a lot of nice words in the 85-page re-regulation proposal…[about] making sure compensation is tied to behavior and accountability,” he said. “But there’s not much action going on.”

There may not have been much action yet, but the administration has taken some steps toward altering compensation practices. Yesterday, the Securities and Exchange Commission proposed rule changes that would “require companies to disclose more about their use of compensation consultants and bolster reporting of stock and option awards.” And ultimately, I think the real problem is not with the administration’s lack of action, but with Congress’.

The administration has explicitly called for legislation that would enact “say on pay,” giving shareholders the ability to vote on their company’s compensation packages. The SEC is already putting this in place for companies receiving TARP money, but it would take an act of Congress to make it the law of the land.

Say on pay would not be a panacea for all that is wrong with Wall Street’s compensation practices, but it seems to have had a positive effect on CEO pay in both Great Britain and Australia. And as Cohan and Nouriel Roubini have suggested, more needs to be done to align compensation with long-term corporate outcomes. But if Congress isn’t willing to move — and most signs point to financial regulation taking a back seat to other legislative matters — there’s little that the administration can do.

Chamber Of Commerce: We Only Like Voting When It Suits Our Purposes

Last week, the Chamber of Commerce announced that it will “vigorously oppose” a new consumer protection agency proposed as part of the Obama administration’s regulatory reform package. But that’s evidently not the only way in which the Chamber is out to influence the debate over the changes facing Wall Street.

Yesterday, the Chamber laid out its opposition to a change — backed by the administration and House Financial Services Chairman Barney Frank (D-MA) — that would allow shareholders to vote on their company’s executive compensation practices, so called “say on pay”:

Opponents of an effort to give shareholders greater rights are centering their attacks on organized labor, arguing that unions are pushing such proposals to bolster their ranks and boost their declining pension funds.

“Big labor unions are trying to achieve at the board table what they cannot achieve at the negotiating table, under the guise of shareholder protection,” said David Hirchsmann, president of the Chamber’s Center for Capital Markets Competitiveness.

So the Chamber opposes the Employee Free Choice Act because it wants to “save the secret ballot,” while also opposing “say on pay,” which would guarantee that shareholders can hold a non-binding vote on their company’s executive pay packages. Isn’t it convenient that the Chamber only thinks voting is important when Big Business can set the rules?

But “say on pay” is really about injecting some sanity back into corporate governance. As Treasury Secretary Tim Geithner said, “[say on pay] has already become the norm for several of our major trading partners.” In two of those countries — Great Britain and Australia — CEO pay “grew 2.4 percent and 25.3 percent, respectively, from 2002 through 2006, while pay in the United States soared 59.9 percent in the same period.”

Some companies in the U.S., including Aflac Co., voluntarily undertake such votes already. “We want people to look at us and say, ‘Here’s a company that will even let you vote!’” said Aflac CEO Daniel Amos. “It’s symbolic, but it’s an important symbol.”

And that’s just the thing: the vote is non-binding, leading some to say that it doesn’t go far enough toward reining in Wall Street excess. As Dean Baker explained:

The current rules allow management insiders to make out like bandits at the expense of shareholders and other stakeholders. This is why clowns get paid tens of millions to run their companies into the ground in the US…Obama’s proposals do not go nearly far enough in taking back power from the insiders. We should have binding shareholder votes on compensation in which unreturned proxies don’t count.

So in the end, “say on pay” is simply an attempt to get some sense of balance back into corporate governance, and to start holding executives accountable to someone other than themselves.

Fox News: New Pay Plan Means Government Will ‘Set Pay Scales’ At Every Company

Yesterday, the Obama administration released its plans for reforming America’s corporate pay structure, including standards for the seven companies that have received the most federal aid and proposals aimed at giving shareholders more say in their company’s pay packages. Of course, this sent Fox off the deep end, and prompted a segment today — complete with Karl Rove — about how the government “will come in and set pay scales” for all kinds of companies. Watch it:

Fox is conflating the two decidedly separate tenets of the Obama plan. The first, which does involve direct government oversight of compensation, only applies to the five most senior executives and 20 most highly paid employees at seven companies that have received billions in government bailout money.

The companies — “American International Group, Citigroup, Bank of America, General Motors, Chrysler and the financing arms of the two automakers” — will have their compensation practices overseen by Washington lawyer Kenneth Feinberg. But I stress, this only applies to companies that are essentially owned by the United States government, and there’s no reason that the government shouldn’t act as a majority owner would. And the Obama administration has already explicitly said that it won’t directly cap salaries, even at these companies.

The other part of the plan, which is called “say on pay,” involves no direct government intervention. The plan would simply ensure that shareholders — the owners of a company — are able to hold a non-binding vote on that company’s pay packages. An odd dynamic has developed in American corporate governance, in which the shareholders don’t have a say over pay practices. This proposal seeks to address that, and far from being an overly intrusive, it may be too weak. James Kwak observed:

If you’re wondering how a non-binding shareholder vote could possibly solve the problems with executive compensation, you’re not alone. I think “say on pay” is slightly better than nothing, because there is a chance that in some cases the additional attention will shame boards into more reasonable packages. But in general, shareholders’ ability to influence corporate governance is pretty weak.

“We’re not telling clients to be prepared for less pay,” David Schmidt, a senior consultant for New York-based compensation firm James F. Reda & Associates, told Bloomberg News. So as much as Fox would like to turn this into another part of Obama’s nefarious plot to implement socialism, that just isn’t the case.

Merrill Lynch CEO Never Considered Disclosing 2008 Fourth Quarter Losses Or Bonuses

Last week, former Merrill Lynch CEO John Thain faced six hours of questioning from New York Attorney General Andrew Cuomo regarding “the bonuses that were given out on the eve of Merrill’s merger with Bank of America (BoA).” Thain has evidently been directed by BoA not to discuss specific bonus details, so Cuomo has filed a motion in the Supreme Court of New York in order to get Thain to talk.

During the initial questioning, though, some other details about Thain’s attitude toward bonuses, and the financial crisis in general, were made quite clear. When Thain was asked if he ever considered “whether Merrill Lynch should disclose its [fourth quarter] losses to its investors,” he essentially said no:

THAIN: Merrill Lynch as a policy, doesn’t make projections; doesn’t give guidance and doesn’t disclose interim results.

Q: And a lot of firms have that and depart from that policy in times where there’s a serious deviation, and given the deviation that was occurring in the fourth quarter of 2008, did you consider whether or not it was appropriate to make a disclosure?

THAIN: The market conditions were generally known and we would not have disclosed interim results in that fourth quarter.

As for Merrill shifting when it paid bonuses, to have them out before BoA took over:

THAIN: I don’t think it’s necessarily the case that we can predict what was going to happen between December 8 and December 31. Again, I’m going to repeat what I said, that bonuses were determined based upon performance and the retention of the people, and there is nothing that happened in the world or the economy that would make you say that those were not the right thing to do for the retention and the reward of the people who were performing.

Remember, this is the same guy who “suggested to directors that he get a 2008 bonus of as much as $10 million” after Merrill incurred catastrophic losses and had to be salvaged by BoA.

As for rewarding “the people who were performing,” in the months before the merger between Merrill and BoA closed, “Merrill’s business deteriorated, resulting in a $15.3 billion post-tax loss in the fourth quarter.” This loss prompted BoA “to seek a second round of taxpayer money” just to stay afloat following the merger. That seems to fall short of a bonus-worthy performance.

Obama’s Executive Compensation Cap: A Good Start

Today, President Barack Obama announced that he is “imposing a cap of $500,000 on the compensation of top executives at companies that receive significant federal assistance in the future”:

Any additional compensation will be in restricted stock that won’t vest until taxpayers have been paid back, according to an administration official.

At Naked Capitalism, Yves Smith wrote that there are many “shortcomings of the supposedly tough plan,” noting that there is “no attempt to take measures relative to the funds committed” and the restrictions are limited to the 50 highest-paid members in each institution. These are fair criticisms, but it’s always easiest to say that measures like these could go further. Instead, Obama’s move could be looked at as simply the first step in a wider effort to reel in Wall St. excess.

Also, enforceability has to be considered. The restrictions need to be realistic enough that they are enforceable, and designed so that the government doesn’t spend an inordinate amount of time and resources on the enforcement effort. As Mary Kane wrote at the Washington Independent, “I’m not sure the the corporate world really understands what’s about to hit it. This will be just the beginning of a major overhaul of the financial system.” Indeed, the pay cap is a good down-payment on that transformation.

How American Workers Subsidize Excessive CEO Compensation

Two weeks after the Government Accountability Office reported that “two-thirds of corporations operating in the United States did not pay taxes” between 1998 and 2008, The Institute for Policy Studies (IPS) released a new study revealing that the American tax payer is subsidizing “executive pay excess” to the tune of $20 billion a year.

In fact, “the more that corporations shell out for executive pay, the more they pocket in profit at the expense of average taxpayers.” Through a series of bureaucratic rules and loopholes, the federal government is transferring billions of dollars to the most privileged Americans:

Large increases in executive pay have had an inverse relationship to falling unionization rates — during the 1980s, as workers began losing their ability to check executive compensation by bargaining with employers for fair wages and benefits, CEO compensation steadily increased.

“Thirty years ago, chief executives averaged only 30 to 40 times the average American worker paycheck.” In 2007, top executives faced almost “no institutional challenge from their workers,” and earned “344 times the salary of the average American worker”:

As the report notes, to restore the balance of power in the workplace, lawmakers should pass the Employee Free Choice Act, “legislation that would help workers
realize their right to organize into unions and bargain collectively with their employers.”

Full disclosure: American Rights At Work is currently advertising for the Employee Free Choice Act on this site, though they had no role in any part of this post.

Norquist: McCain Can ‘Say Anything He Wants’ About CEO Pay ‘As Long As He’s Not Talking About Legislation’

During an interview on the Fox Business Channel yesterday, right-wing anti-tax activist Grover Norquist revealed that John McCain’s promise to fight corporate greed is simply empty talk. Norquist essentially stated that McCain has embraced an all-rhetoric, do-nothing attitude with regard to executive compensation:

CAVUTO: So when he [McCain] talks about CEO salaries that are out of wack, that is one thing you think he should stay out of?

NORQUIST: Well first of all, it doesn’t do any harm, the president can say anything he wants, I guess…As long as he’s not talking about legislation, let him talk!

CAVUTO: Alright, so the windfall profit tax-type stuff that we see out of Democrats on the hill, you do not see him subscribing to that?

NORQUIST: No, and that’s a very big difference…You can complain about something, but when you ask the government to come in…that’s slightly different.

In a separate interview on CNN’s Glenn Beck Show, Norquist told guest host Michael Smerconish that McCain’s tax plan is a greater version of the Bush tax cuts. “[McCain] has recognized and stated that [Bush's] tax cuts are what turned the economy around, that they’re necessary to keep the economy growing and that he wants them continued. He’s gone beyond that, to call for full expensing for business investment, taking the corporate rate from 35% down to 25%… ”

Watch it:

Norquist hasn’t always been McCain’s biggest fan. In 2005, he called McCain was a “tax-increasing Bolshevik.” But now that McCain has outsourced his economic agenda to Grover Norquist, Norquist is singing a different tune.

Where Does McCain Stand On Executive Compensation?

Our guest blogger is Sam Davis, Policy Analyst at the Center for American Progress Action Fund.

This past Saturday, Sen. John McCain (R-AZ) told reporters: “I think it’s unconscionable when the guy who apparently is the head of Countrywide and his co-conspirators make huge amounts of money while Americans are facing the threat of losing their own homes.”

This sounds surprising, but we’ve heard it before. In 2002, President Bush assailed CEOs who “collect huge bonus packages when the value of their company dramatically declines,” promising to give shareholders the leverage they need to ensure greater accountability over a company’s board. More than five years later, the same thing is happening again.

If Senator McCain wants to get serious about the “unconscionable” rise in CEO pay at failing companies, there’s plenty he could do that would bring fairness and accountability back into the executive compensation system — even measures as simple as requiring that public companies submit executive pay plans to a nonbinding shareholder vote.

Reporters should ask Senator McCain what he thinks of that idea.

– Sam Davis

UPDATE: Again, if Senator McCain truly finds it “unconscionable” and “outrageous” that CEOs cash out with millions while shareholders, consumers and employees lose out, and believes shareholders and directors should punish these CEOs, what does he think of his own top economic adviser, Carly Fiorina, and how should she be reprimanded?

The former chief executive of Hewlett-Packard, Fiorina presided over the first layoffs in the 50-year history of the company during her tenure, an imperious drive to acquire Compaq Computer that was ultimately deemed a “lemon,” a 50% drop in the company’s stock, and the layoff of over 20,000 workers. Unconscionably and outrageously taking home $180 million in total compensation and a $21.1 million severance package.