Say what you want about movie producer Michael Moore, but he is no fool in tapping into the American spirit. Moore takes on Wall Street in highlighting the enormous bank bailouts emanating from this economic crisis. While there are many factors that drove our banking industry and our economy to its knees, ultimately the Wall Street compensation system allowed those taking risk to ’swing for the fences’ while playing ‘heads we win, tails you lose.’ Washington is going to fix this, right? Having appointed a pay czar in Ken Feinberg, the Obama administration is going to address the crux of this critical issue and reform it, right? I mean, The Wall Street Journal this very morning profiles how Pay Czar Targets Salary Cuts:
The Obama administration’s pay czar is planning to clamp down on compensation at firms receiving large sums of government aid by cutting annual cash salaries for many of the top employees under his authority, according to people familiar with the matter.
Instead of awarding large cash salaries, Kenneth Feinberg is planning to shift a chunk of an employee’s annual salary into stock that cannot be accessed for several years, these people said. Such a move, the most intrusive yet into corporate compensation, would mark the government’s first effort to curb the take-home pay of everyone from auto executives to financial traders.
Folks, with all due respect to Ken Feinberg, these efforts to implement reform in Wall Street compensation practices are largely a joke. Why? While the subtitle of the WSJ’s article includes the term ‘compensation,’ Feinberg’s focus is limited to the term in the title, that being ’salary.’
The question then begs as to what percentage salary is of the overall total compensation for those who take and manage the significant risk within these Wall Street banks. Try 10%. Thus, even if Feinberg’s proposal were to increase the stock versus cash component within salaries by 50%, the overall impact on total compensation would be a mere 5%. Not exactly a meaningful development.
Be mindful that when the topic of total compensation reform was broached earlier this year, Wall Street banks rushed to increase salaries in an attempt to beat Washington to the punch. Since that point, though, the Wall Street lobby has obviously been very hard at work to strictly focus compensation reform to the salary component. Now that the focus of reform is limited to salaries, watch the Wall Street banks ratchet these salaries right back down.
What is the takeaway from this? Feinberg and the Obama administration will wave the flag to the American public and pronounce, “we have addressed the pay issue on Wall Street,” but truth be told Wall Street won this battle and it is largely business as usual.
One further point. Wall Street utilizes the argument that it can’t compete to keep its best people from fleeing to hedge funds if compensation reform is overly restrictive. What is the crux of the problem here? Our tax system allows hedge fund managers to take their compensation and put it into their fund under what is known as ‘carried interest.’ In the process, when the managers withdraw the money it is taxed as long term capital gains instead of ordinary income. That tax arbitrage should be eliminated. Why isn’t it? The hedge fund lobby buys off Washington every election cycle.
Compensation reform? Please.
Follow the money.