Saturday, January 31, 2009

‘Shameful’.

That was President Obama’s comment on this week's news that Wall Street Bankers had been paid a total of $18.4bn in bonuses for 2008. The very banks in fact that had just received a multibillion dollar bailout package from the government, i.e. the American taxpayer. The most blatant case being Merrill Lynch (annual loss 2008: $15.3bn) which paid bonuses earlier than normal in December, just before being taken over by Bank of America with expected new government funding of $20bn.

The news came on the day when we discussed the corruption perception index of Transparency International in class at Schulich. We had a nice discussion why it is that often poor countries range high on the list and one student suggested that in poorer countries bribes are just that much more seductive as people are relatively poorer, and therefore more tempted to take advantage of a situation. But its not just poverty: comparing Sweden and Italy – countries of similar wealth one could argue – it is interesting to see the difference of more than 4 points on the 10 point scale. Italy is a more collectivist culture, where family ties and long term relationships matter more than in individualistic and meritocratic countries.

From an ethical perspective the question really is: why is it so much more corrupt to succumb to the temptations of poverty or to give preferential treatment to friends and family (earning you a bad score on the TI index) than to do what has been standing practice in business now for decades: to reward managers according to the market performance of the assets under their fiduciary trust?

These practices raise eyebrows and produce anger (one has hardly seen Obama so agitated in 2 years on the campaign trail) now where these bonuses come directly out of the taxpayers’ pockets and happen in the face of utter failure of the rewarded managers. But in our view it just exacerbates the general issue: what exactly is the ethical justification for the explosion of executive compensation particularly in the Anglo-Saxon parts of the world? Being rewarded for success – fine. But more often than not, the link between stock prices and individual managers’ performance is more than tenuous.

This ‘height of irresponsibility’ (Obama) will ask for new rules for the game. Obama will hardly avoid addressing this problem of executive compensation. Certainly in the eyes of most Americans (and the rest of us, for that matter) there is something deeply questionable about these practices. Bank of America CEO Thain has resigned over the scandal. Whether he paid back his bonus though was not reported…

1 comment:

  1. The example brought about with the corruption perception index is a very stimulating idea. How shameless it is for bankers to take home bonuses from bailout funds financed by the government, which came out of taxpayers’ pockets, when the bankers were the ultimate culprit of their companies’ failure. You mentioned, “This ‘height of irresponsibility’ (Obama) will ask for new rules for the game. Obama will hardly avoid addressing this problem of executive compensation.” Obama certainly took a firm stance in the issue fairly swiftly. He imposed a mandatory salary cap of $500,000 a year for top executives who resides in companies that receive funds from the bailout plan, whereby additional compensation to come in the form of stock.

    I agree completely with the idea that, “Being rewarded for success – fine. But more often than not, the link between stock prices and individual managers’ performance is more than tenuous.” Yet, as this compensation issue continues to unfold, it is all the more upsetting, and shocking, to read news reports that these executives are actually exploring ways to go around the salary cap that Obama imposed. They threaten to pull out stakes and resign from their positions if the Obama administration formalizes those limits. Honestly, how much more shameless can these executives be? In fact, most of my friends who just graduated make around $50,000 annually as they enter the workforce, one-tenth of the proposed half-million dollar annual limit. To think these top executives would be about to find a position with better pay in this market is like kids believing that Santa exists.

    I believe people who should be running corporations should not be these bankers who seem to be motivated solely by the instrumental satisfaction of attaining great financial compensation. There are abundant amount of qualified people who are willing to put in a hard day’s work for the opportunity to be part of a multibillion dollar, bulge-bracket corporations, for reasons that go beyond financial satisfaction. These people understand that there are times when money cannot trade for satisfaction. They understand that past a certain threshold, money provides little satisfaction. What they want is to make a difference in the world. And I believe these people, who have a far more profuse and concrete prospect of the company, should be the very ones running multibillion dollar corporations. Perhaps this issue will have a cleansing effect in the highest reaches of corporate power, as the greedy step down to make room for the virtuous.

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