As a general rule, more government regulation means less free market capitalism. However, if there's one place that such safeguards and oversight are needed, it's with the disproportionately high salaries for Wall St executives. This is especially true of the big banks, such as Goldman Sachs and JPMorgan, who took bailout money in the wake of the 2008 financial crisis.
Holding Bankers Accountable
According to the New York Times, "new limits on banker bonuses would make the highest-paid employees at the biggest banks wait at least four years to receive parts of their annual pay. If the proposals are completed in the coming months, banks would also have to reclaim bonuses from bankers who take risks that lead to big financial losses."
The second measure of reclaiming compensation in the event of losses (or, it might be added, if the individual is caught engaging in illegal or unethical practices) is known as a "clawback." The new rules would make it possible for clawbacks to be imposed up to seven years after the pay is received, similar in length to the statute of limitations.
- Lloyd Blankfein, Goldman Sachs CEO: earned $24 million in 2014, $23 million in 2015
- Jamie Dimon, JPMorgan CEO: earned $20 million each in 2013 and 2014
- John Stumpf, Wells Fargo CEO: earned $19.3 million in 2014
(Keep in mind that both Dimon and Blankfein individually have an estimated net worth of over $1 billion.)
Two Steps Forward, One Step Back
It has been pointed out by one prominent regulator that the people running big financial institutions ought to be held directly accountable "if their desire [for] personal enrichment leads to decision-making that results in material losses." This will hopefully reverse some troubling trends leading up to the financial crisis. Before 2008, the structure of many executive bonuses actually encouraged them to take huge risks for short-term gains rather than valuing the long-term health of the firm (and shareholders' investments).
However, asset managers and hedge funds may be exempt from the new rules. At the same time, these stricter rules are pushing some of the fresh blood entering Wall St into the shadier corners of the financial world.
Others reasonably claim that the rules don't go far enough. Withholding pay from big execs for up to three years is already becoming an industry-wide practice. Such restrictions are limited to incentive-based pay, anyway—plus, the proposed regulations only withhold 60% of such pay. By comparison, in Europe and the U.K., restrictions are far stronger, often imposing hard caps on salaries and bonuses in addition to withholding incentives for seven years. On top of it all, none of these greedy bankers have faced any criminal implications.
Fattest Cats Running Out of Chow?
This sort of madness in executive compensation most alarming with bankers, but is not limited to the banking industry. A perfect example comes from the tech firm Ultimate Software Group. CEO Scott Scherr raked in $38 million last year—more than the entire company itself earned in profits!
At any rate, the public will be able to comment on the new banker compensation rules until July. These restrictions and regulations have been continuously drafted by six different regulatory agencies since the Dodd-Frank legislation was originally passed in 2010. Beyond the slow pace of outlining the specifics of the rules the act called for, critics also point out that this may be "too many cooks in the kitchen." Moreover, it will take many months after the July deadline before anything goes into effect.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.