The morality of pay

The Church of England has taken a line on executive pay. You may ask what has that body got to do with the world of business. Well , there is the small matter that the Church manages a £ 5.3 bn portfolio and is a shareholder in many companies. And, of course, it is a voice of morality, however much you may agree or disagree with it.

The Church of England has said that it will not vote in favour of executive pay proposals that have bonuses more than 4 times the salary. While its influence as a shareholder might be somewhat limited, its voice has the benefit of a moral argument. Just a little while ago shareholders in HSBC voted to limit bonuses to a maximum of 10 times annual pay.

Readers may pause here to consider the obvious question. Who on earth earns bonuses many times his salary ? This blogger has seen a lot in business. Outside of the financial services industry,  there is virtually no place where an employee can earn 10 times his salary as a bonus. So what's so special about the financial services industry ??

What is special, is that the pay structure for bankers has remained rooted in the past. Years ago, most banking businesses, especially investment banks , were partnerships. Salary at the top tended to be very low, and bonuses were really a form of profit sharing amongst the partners, who were the owners. That's why, until not so long ago, being made a partner in Goldman Sachs was such a big thing. Now, most of these entities are corporates. Senior managers are employees, not owners and therefore have no right to profit sharing. But the old pay structure remained and its entirely the fault of the shareholders that they let it continue.

Its a completely specious argument that such stratospheric pay is a reward for talent and performance and if they don't pay such amounts, talent will go elsewhere. The market for top talent is highly imperfect and is not ruled by price alone. And beyond a certain point Maslow's theory kicks in - there isn't that much of a difference between $25m and $ 30m, although mathematically one is 20% higher than the other. And come to think of it, a little less talent going to finance would be a good thing - some plodders would bring sanity into that insane world of risk taking.

This blogger is of the view that the Church of England is absolutely right in taking the stance it has done. And other shareholders would be wise to follow suit.

Read More

What was he thinking ?

You normally associate business leaders with high intellect, sound judgment, and in general, greater ability than many of us, mere mortals. Then I read this front page report in today's Guardian in the UK.

I had promised to myself that I'd stop writing about either bankers or Goldman Sachs after my last two posts on the subject. But what can you do when somebody makes a speech like that. And where does he chose to make these remarks ? In St Paul's cathedral, no less.

If you know of any greater act of appalling judgement, please let me know.

Read More

The AIG Bonus affair

The newslines are awash with reports of AIG paying out bonuses of $165 m, after getting a bailout of $ 170 bn from the US government to stay afloat. Normally, I am of the view that too much noise is being made on executive pay, stemming largely from jealousy, and it doesn't deserve all the attention its getting. But in this case, there is every cause for outrage.

The facts are as follows. These bonuses are retention money's guaranteed to the key executives in AIG's Financial Products Division. For those unfamiliar with the situation, this is the Division that brought AIG to its knees with huge positions built on credit default swaps. When the shit hit the roof, AIG needed these executives to continue with the company to recover whatever could be recovered. They were the only people who probably understood what they did. Hence the retention bonuses.

Ed Libby, the Chairman of AIG has laid out why the bonuses had to be paid in his letter to Tim Geithner, the US Treasury Secretary. In plain English his position is as follows

• He hates these bonuses as well
• He is not getting any
• He and the top 25 executives have committed to draw a salary of $1 for the year
• The company needs these guys in the Financial Products Division
• The bonuses are contractually committed
• AIG will get sued if it doesn't pay and will then have to pay twice the amount
• Hence regretfully it has to be paid, much as everybody dislikes it

AIG is probably legally correct, but wrong in every other aspect in the way its handling this situation. It will get egg on its face. The US government is not going to sit idly and watch this go by, law or not.

With the wonderful advantage of throwing a stone from the outside, my humble suggestion of an alternative way of dealing with the situation is as follows

• Tell the guys in Financial Products Division, it would be complete suicide to pay these amounts, contractual or not
• Tell them , the company values their contribution and will pay 2 times this amount, after the bailout situation has been reversed ; maybe 2 or 3 years from now. Remind them that if the company had gone into Chapter 11, they wouldn't have got anything at all; so this is better than nothing.
• Ask these guys if they would like to voluntarily agree to this. Maybe 50% will and 50% won't.
• Tell those that won't, that the bonuses are cancelled and they can do as they wish.
• Tell them that they would publish their names in the press and that they are welcome to sue. Tell them that they may win, but no serious company would employ them after that.

Public opinion, at the end, is more powerful than the law. After all even the most powerful men on earth are scared of public opinion turning against them.

And AIG may find that its smart employees aren't stupid enough to take on public anger for a million or two in bonuses.

PS - After I wrote this post, I came across an article in the New York Times with the opposite point of view. To read this, click here

Read More