At the Wall Street firms where I’ve worked it was often said that, “the assets of the company ride up and down the elevator every day.” This adage recognizes the critical role that individual talent plays in the financial services industry. President Obama’s new restrictions on executive pay are largely symbolic, but to the degree they do impact firms, they will serve to deplete their human assets, driving the most skilled individuals to other firms. As a taxpayer, I want the most talented people to be running the firms which are TARP beneficiaries. Compensation restrictions will tend to push those people to firms that can offer more attractive remuneration packages.
Wall Street’s emphasis on bonuses is stupid. As others have noted, Wall Street views bonuses unlike any other industry. There are few, if any, industries where the majority of decision-making employees can expect bonuses that are in excess of their salaries, often by a factor of several 100 percent. This drives some very odd behaviour that may serve the annual bonus pool, but does little for long term shareholder value or for customers. This is particularly damaging when the most senior executives are tied to this structure.
So why has this system persisted? The answer lies in the tax code. Efforts to curb executive compensation in the early ’90s pushed compensation to be far more bonus-oriented through limitations on the deductibility of salaries (but did not limit other forms of compensation).
Wall Streets bonus culture is a result of excessive regulation. President Obama’s move to impose further restrictions and rules is a step in the wrong direction.
Forbes published an article of mine with more details. You can read it here.