Corporate Governance

Executive Compensation and the Financial Crisis: A Problem In Search of a Solution (Still) (Part 2)

By J Robert Brown Jr.

We are examining whether compensation practices that were identified as a possible cause of the financial crisis have changed.       

As we noted in the last post, the Council for Institutional Investors sponsored a report on excutive compensation.  The Report (Wall Street Pay, Size, Structure and Significance for Shareowners,  Paul Hodgson, Senior Research Associate, with Greg Ruel, Advisory Services Manager, and Michelle Lamb, Research Associate, The Corporate Library, Nov. 2010), examined compensation of a number of large financial firms both before and after the financial crisis. 

Of the most significant conclusions about pre-crisis compensation concerned the amount of compensation.  As the Report noted:

• Wall Street's median total realized compensation levels were between two and three times the levels found in the rest of the Fortune 50 during the five years from 2003–2007. The differential was driven for the most part by Wall Street's appetite for larger awards of time-restricted stock.

In addition, the large amounts were not linked to long term performance goals.  As the Report noted:

• Little or no Wall Street compensation was linked to long-term future performance measures. This contrasts with compensation at many non-financial companies, where incentive pay was awarded for hitting long-term performance targets.

Both factors contributed to the excessive risk taking.  Again, as the Report noted:

• In sum, the lack of long-term performance measurement on Wall Street and high absolute levels of compensation likely helped to fuel excessive risk-taking. Large amounts of compensation were delivered without restrictions and based on short-term performance. Such payouts were partly a legacy of the banks' origins as partnerships — but without the moderating element of partner-ownership. 

In short, the problems arose not only in the form of the consideration but the amount.  

Full post as published by The Race to the Bottom on December 15, 2010 (boomark / email).