Monday, June 8, 2009

Government Hires a Pay Czar

JP Morgan and Goldman Sachs are anxiously drumming on their desks, checking their watches, waiting to be given the all clear to pay back all that government money they never wanted (or needed, mind you) in the first place.  They don't like it when government officials, with their lowly six figure salaries, tell them they can't pay their 25 year-old traders $6 million dollars if they feel like it.  They figure, if they can just get out from under this albatross, they can get back to business as usual (parties, chicks, private jets, golf boondoggles.)  The only problem is, even if they pay all the TARP funds back, it appears as if they're going to be subject to tighter compensation scrutiny anyway.  The Obama administration will be issuing broad principles and standards on compensation that the government would like the financial industry to observe.  The details are murky at this point, but there is little doubt that the government's take on financial industry comp will be interesting to say the least.  Those institutions receiving at least two federal bailouts will be required to submit any major executive pay changes for approval by the new Pay Czar.  I wonder what will happen to all of the recent announcements by banks that they will be doubling and tripling salaries?  Wonder how the Pay Czar is going to feel about that maneuver?  If I were the Pay Czar, my first move would be to ban the use of compensation consultants by boards as I believe they have been instrumental in jacking up the absurd executive compensation packages linked to no performance that we've seen in corporate America in recent years.  Because seriously, why can't boards figure out how to compensate their companies' employees without having to pay someone to tell them?  It seems like corporate boards have done little to root out fraud, or notice that management was taking too much risk, is it too much to ask that they get a spine and get involved in appropriately compensating executives?  Apparently, which is why we now have a Pay Czar.

The most curious part of the New York Tines article is the following sentence: "Banks that received money from the relief program must also curb outsize severance packages, and pull back bonuses that were based on fraudulent or misstated results."  Now, I'm sure that part of this is in reference to the Wall Street Journal report a few days ago about Citibank halting severance payments to five former employees to whom it had promised over $100 million when they left a year ago.  But, does it mean that the government can go after bonuses that were paid in 2007 that were based on unrealized profits that turned negative in 2008?  Can the government then clawback any money it paid to the AIG financial products unit where the "earnings" were a complete mirage for years?  If so, things are about to get really interesting. 

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