Fair pay for bankers

An excellent piece by Steven Brill in the New York Times magazine. He looks in detail at Ken Feinberg's efforts as "special master for executive compensation" in firms receiving exceptional assistance under the TARP. I was impressed with Feinberg when I interviewed him last October. Brill seems to feel the same way.

Feinberg's work could have wider implications than suggested by the scope of his assignment (which is ever diminishing, now that banks are hurrying to pay back their TARP money).

Will Feinberg's work become a model for changing that structure [of executive pay]? He has said he would like for that to happen, and the Federal Reserve Bank has announced that it will soon require all major banks to abide by structural guidelines intended to assure that executives are compensated based on performance and that they are not given incentives to take undue risk. European regulators have been talking tough, too. And Goldman Sachs has already mimicked the centerpiece of Feinberg's new pay structure by dispensing all bonuses to its top people in stock that must be held for five years. That structure, rather than the actual amounts he awarded, could be Feinberg's lasting contribution -- but only if its influence spreads beyond the corporate boardrooms that have been temporarily in the public spotlight.

Quite so. When Feinberg talked to me, he also stressed the broader corporate governance implications of his efforts. There are lessons in his experience that shareholders (especially institutional investors) and independent directors (if there are such things) should take to heart. The principal responsibility here lies with boards--and they need their spines stiffening and their own incentives got right if much is to happen. At a minimum, legislation to open executive pay to public scrutiny is required.

For reasons I don't entirely understand, Felix Salmon seems annoyed with Brill and Feinberg alike. His strictures against "salarised stock" are especially baffling. Salarised stock, with vesting restrictions, seems a good way to pay top executives of any enterprise. Call it a "guaranteed bonus" if you must--but what exactly is wrong with that? You could designate some fraction of anybody's salary as a "guaranteed bonus", and what difference would it make? The point is that badly designed "performance related" bonuses can encourage excessive risk-taking. Compared with that, a guaranteed bonus--or just straight salary--has a lot to be said for it.

Salmon objects to the prevailing level of finance industry pay, as opposed to the structure (and the way incentives affect risk-taking).

But what Brill never really addresses is the question in the headline of his piece: how much are these bankers actually worth? And he also never addresses the question of the degree to which seven- and eight-figure salaries caused the crisis in the first place, or whether we actually want greedy people in these positions who won't do their jobs unless they're paid a hundred grand a week.

Good questions, but a bit hard on Brill. Who has addressed them? How much does Salmon think these bankers are actually worth? And how would he suggest imposing that wisdom on the industry? "From now on, all banks will pay modest salaries. (Details to follow.)"