Against Monopoly

defending the right to innovate

Monopoly corrupts. Absolute monopoly corrupts absolutely.

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Limiting banker compensation isn't real reform

"What's a Bailed-Out Banker Really Worth?" writes Steven Brill in his exploration of the ins and outs of setting executive salaries and benefits under the government's bailout of the too-big-to-fail banks and companies link here.

Started in response to the public anger over the financial mess, it is not likely to satisfy most people, based on this account. We are more likely to find our anger reignited, first by the level of compensation established and second by the behavior of the banks and their senior management, most of whom orally agreed to return their 2009 bonuses but then all but two failed to do so.

In some ways, this account is of a kabuki dance between special master for executive compensation Kenneth Feinberg on the one hand and the Wall Street banks where "by their account, all the bankers are above average and worth every penny of it", the Treasury Department, and the New York Fed on the other. The proof was the happiness of the bankers at what they got about 60 percent of the total compensation they had tried to justify.

Brill notes that the executives, their boards of directors, and the recruiters for board members are tightly meshed in their common interests in maximizing the levels of compensation, so that won't change.

Where the article fails is its lack of attention to overall financial reform. Executive compensation is a minor issue compared to the tens of billions that were earned by the banks and passed out to the Wall Street elite. The public is still waiting for that and hopefully will not be put off by minor cosmetic fixes such as are described here.


True, limiting bank compensation is not real reform. But I think that we are overlooking a "big picture" concern. In an ideal competitive market the bankers would not be able able to earn extort huge compensation entitlements because margins would be "thin" based on competition. This leads me to believe that the banking system is structurally flawed since it is not sufficiently competitive.

What has also been disturbing with this whole compensation debate is how ludicrous it is. Huge compensation packages are perceived as an entitlement, not something actually earned. Furthermore, we do seem to evaluate if a compensation package even makes any rationale economic sense.

In terms of ludicrous comments, a female commentator on CNBC stated that if a shareholder did not like the compensation packages being granted by the board, that the sharholder should sell their shares! Technically, the managers work for the shareholders who should be able to define what management should earn. So the shareholder should have a right to fire the executive.

Other commentators have talked about how the board of directors should be the only body making compensation decisions which again leaves the shareholders out in the cold. Not to mention that the conflict of interest that arises when the members of the compensation committee are appointed to "gift" management favorable treatment. Dilbert had a wonderful cartoon on this.

Ultimately this boils down to a question of ethics. Neither the recipient nor granter of the compensation packages seem to believe that they have any fiduciary duty to the shareholders and society at large.

Ops! Corrected -> Furthermore, we do NOT seem to evaluate whether a compensation package even makes any rationale economic sense.
"Dilbert had a wonderful cartoon on this."


I will make an attempt to find it, but its been a while since the cartoon was published. Too bad I didn't save the link at the time.
Finally: http://www.dilbert.com/strips/comic/2009-06-13/ http://www.dilbert.com/strips/comic/2009-06-17/

also see: http://www.dilbert.com/strips/comic/2009-06-11/ http://www.dilbert.com/strips/comic/2009-06-12/

Here are some close ones:




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