The Pride of the Banking Class

Obama’s proposed restrictions on banker’s pay has caused a lot of howling. It would seem that many feel these cosmetic gestures–deferred compensation is a big backdoor in Obama’s plan–are an affront to the idea of the financial industry’s special place in our society. Here Jacob Weisberg argues in Newsweek for leniency :

The current peasant revolt, which blurs indignation at the underlying inequities and the search for culprits in the catastrophe, has been far too categorical. Let’s say you work for a bank in the more prosaic areas of consumer banking, private wealth management, corporate underwriting, investment banking, credit cards, or trading. You might well have had a poor year last year and seen your bonus vanish. But you also may have worked hard, managed risk effectively, and earned money for your firm that was wiped out by losses in esoteric forms of finance. It may be reasonable to deny anyone at a money-losing business a bonus, but it’s irrational and malicious to suggest that one and all deserve a scarlet letter. Government-mandated salary caps risk institutionalizing failure, creating new perverse incentives, and deterring talent when it is most needed. A CEO who can turn around Citigroup—which could save tens of billions in taxpayer funds—is worth a lot more than $500,000.

Vikram Pandit was already paid several hundred million dollars (in the form of the purchase of his hedge fund that Citi closed shortly after) to come and save Citigroup. Is it too much to ask that he work off the compensation he’s already received?

Further down the pay grades, there’s nothing wrong with an organization asking its members to share sacrifice. In fact, it should build the corporate culture to prevent problems like AIG’s financial products division. The point of bonuses and options is to pay the entire company out of profits and reduce the cost structure in leaner times.

Losing your bonus because another division screwed up is part of corporate life. And good check on recklessness at all levels of a company. Why shouldn’t the CEO feel the wrath and frustration of the profitable divisions when he or she has allowed another group to go off the reservation.

Sacrifice comes with the corporate territory. The reason so many talented finance people start their own firms over the last decade is so they wouldn’t have to share their profits in the form of contribution. Going out on your own is risky. Succeed and you’re rewarded; fail and you suffer.

Staying in a corporation is about benefitting from the entire enterprise. Some years you carry other divisions, some years they carry you. When the whole place has to take money from the government to survive, you should be willing to take a pay cut until the bad weather passes–or go out on your own.

Source:

In Defense of Bankers
JACOB WEISBERG
Newsweek; February 7, 2009
http://www.newsweek.com/id/183680