Mark Gritter (markgritter) wrote,
Mark Gritter

Feel for the Poor Investment Bank Startups

The Star Trib ran this Matthew Lynn op-ed arguing that limits on financial industry pay would favor the incumbents. Which, to be fair, is probably true. But I'm puzzled by the way that he dismisses equity compensation:

Likewise, Blankfein wants to have rules controlling the way bankers get paid, requiring more of the rewards to be allocated in stock. And, in fairness, there is much sense in that. Yet it makes a big difference who you are. Most of us would be happy to receive a big parcel marked “Shares in Goldman Sachs.” We wouldn’t be so happy to receive one marked “Shares in a Small Unknown Bank That Has Some Good Ideas for Eating Goldman’s Lunch.” Most people would prefer to have some cash instead. Again, it favors the existing big firms over new competitors.

Anybody making this argument in Silicon Valley would get laughed out of the room. Is the Wall Street culture that different? Or is he just being being deliberately obtuse about the difference in upside between equity in a startup and equity in an established concern? Startups routinely hire people away from large companies for less salary, fewer benefits, and smaller (i.e., *no*) bonuses.

The article touches only tangentially on the reason people are upset. Nobody cares if investment bankers make money when times are good. They get upset when it's a "heads I win, tails you lose" situation--- bonuses for the organizations that trashed the economy, "retention" bonuses because the performance-related bonuses aren't big enough, and so on.

It's not just the financial industry. In the business section today the "CEO Pay Watch" column profiled Paul Finkelstein of Regis Corporation, starting with this note:

Because of the deteriorating economic conditions in 2009, Regis decided midyear to alter its executive incentive plan. From its proxy: "In order to engage and motivate executives for achievement of business objectives... aligned with the current economic environment for hte remainder of the fiscal year, the committee approved a 'supplemental award' for fiscal 2009."

Translation: "Remember when we promised our shareholders to pay for performance? We lied, we're just paying market rate for the guy presiding over our -33.3% return to investors, and claiming it's performance-related." If the stock goes up, Finkelstein wins. If the stock goes down, they rework his pay to "motivate" him some more.

Q: Why didn't they tie the pay to relative rather than absolute metrics? That would allow rewarding a good CEO even in a bad economy, instead of having to move the goalposts.

cynical A: because then 50% of CEOs wouldn't get any performance pay, illustrating how useless they are in contributing to shareholder value.
Tags: economics, finance, rant
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