A Synopsis Of Washington's Big Day For Pay

It was banker pay slashing day in the nation's capital. First, we have the final detail out explaining how Obama administration pay czar Kenneth Feinberg will limit compensation for bailout recipients. Separately, but singing in tune, the Federal Reserve released its pay guidelines for its 28 largest banks. I've written rather extensively on compensation limits, and addressed both topics before. The news is pretty much what I've been expecting, but it's worth taking a few minutes to assess how Wall Street compensation changed today.

The Czar

Let's start with the ruling coming down from President Obama's Special Master of Compensation. Here are the highlights for the 175 executives' salaries he has control over:

- There will be no clawbacks of past compensation.
- Cash salaries are being reduced, 90%, on average.
- Total compensation will decline by 50%, on average.
- Cash guarantees are restructured to be stock.
- Three still made more than $1 million, AIG's CEO and two employees at Chrysler.
- Most others were limited to $500,000 or less.

First, in case it wasn't clear, total compensation would include stock and other deferred compensation, which is how cash was slashed by so much but total comp was only cut in half. As expected, these executives will be getting very, very little cash relative to their expected compensation. That stock also must be held as a long-term investment.

Second, are those really the only three executives that deserve more than $1 million? AIG's new CEO -- of all people? And two employees at embattled auto company Chrysler? Feinberg might know something that I don't, but those seem like some pretty odd choices to be the only three to exceed the million-dollar threshold.

Also notable, Citigroup energy trader Andrew Hall's $100 million bonus won't pass through Feinberg's hands. Citi sold the unit, and Hall will presumably get the payment from his new management instead.

Finally, and this is my favorite part, Bloomberg recounts Feinberg as saying:

He said he hoped his focus on lowering cash salaries in favor of stock awards will be "voluntarily picked up in the marketplace."

Yeah. Well, they always have been, so that shouldn't be hard. Of course, I presume he doesn't have the same hopes for his total compensation limits catching on. This year's Wall Street bonus pool quickly dismisses that possibility. Bankers and traders will continue to pay themselves generously.

The Fed

I'd argue that the Fed's proposed guidelines matter a lot more than Feinberg's rulings, since as soon as the bailouts are repaid, the pay czar is no more. The Fed, however, will live forever, unless Ron Paul has his way.

Lucky for Wall Street, the Fed's proposed rules are far more benign. They require no caps, unlike Feinberg's demands. The Fed isn't slashing anything. It's also only concerned with the 28 largest firms.

As expected, the Fed will review the pay structures of these firms regularly to make sure compensation practices aren't promoting excessive risk. Little of what the Fed urges contains quantitative guides. But here's one of the few concrete suggestions:

In addition, some have suggested that one or more formulaic limits be adopted for some or all banking organizations, and, in particular, 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.

As I've said in the past, this is pretty much how it's worked at most banks before, so I doubt such talk has bankers shaking in their Gucci loafers. The only difference is that the Fed does leave the door open for some of that deferred compensation to be clawed back if things go bad. I don't think that's currently a very common practice.

But most of the Fed's recommendations are fuzzy, at best. Take, for example, its advice about golden parachutes -- when executives depart firms with gigantic pay packages:

Banking organizations should carefully consider the potential for "golden parachutes" and the vesting arrangements for deferred compensation to affect the risk-taking behavior of employees while at the organizations.

I would hope that this amounts to common sense. So should much of its other more qualitative suggestions. Here's another:

As an example, under a balanced incentive compensation arrangement, two employees who generate the same amount of short-term revenue or profit for an organization should not receive the same amount of incentive compensation if the risks taken by the employees in generating that revenue or profit differ materially.

Well, obviously! If anyone should understand that risk needs to be taken into account when determining the value of an asset, it's a bank. As a result, I can't imagine that this isn't already how things work when setting compensation at banks.

The Fed also makes sure that it can enforce its rules. Here's what that would entail:

As provided under section 8 of the Federal Deposit Insurance Act (12 U.S.C. 1818), an enforcement action may, among other things, require an organization to develop a corrective action plan that is acceptable to the Federal Reserve to rectify deficiencies in its incentive compensation arrangements or related processes. Where warranted, the Federal Reserve may require the organization to take affirmative action to correct or remedy deficiencies related to the organization's incentive compensation practices until its corrective action plan is implemented.

Again, not exactly scary stuff. But still, the Fed weighing in on banker compensation is something most bankers probably couldn't have imagined a few years ago. So even though these rules seem pretty harmless, I doubt Wall Street will like the Fed sniffing around its bonus pools. But it also probably isn't too worried either.