Do the new rules pay off?
The compensation cops are all over the banking industry as you read this.
Government is cracking the whip, or at least talking tough, about pay packages at banks and other companies that have been blamed for so much financial excess dragging down the entire economy.
Part of me wants to say: It’s about time. But the other part, tethered to reality, doubts it will do much good and wonders about the potential unintended consequences.
There is obvious political and populist power behind any cap on compensation for the fat cats who caused so much trouble. Who wouldn’t enjoy watching irresponsible rich guys (and the rare rich woman) get hit where it hurts?
But government pay restrictions are a backward solution to the problem, trying to choke the incentive for people to do greedy, stupid things so they won’t happen in the first place.
Regulators have the capacity to watch banks and other financial companies, detect exactly those problems, and stop them. Sadly, they’ve failed at that job more than once.
Besides, I’m not even remotely convinced that pay rules will really limit the compensation of top financial executives. An entire consulting industry has been built around the challenge of circumventing common sense about the way executives get paid. Can a government plan really beat that?
Take a look at what’s happened in just the past day or two. First, the Obama administration’s special pay master laid down the law to the most senior and highest-paid people running seven giant financial companies and automakers buoyed by truckloads of government money.
Kenneth Feinberg, a Brockton guy who went to UMass long before he became famous as an arbiter of sensitive money disputes, cut cash payments by up to 90 percent and overall compensation by about half for the top 25 people at those companies.
Bank of America was a good example. Thirteen executives saw their pay adjusted (the other dozen had already left the company). Outgoing chief executive Ken Lewis gets zippo in salary, but still walks with his $53 million-plus in deferred compensation and pension benefits.
The Federal Reserve was right behind Feinberg yesterday, rolling out its own proposal to include compensation issues in its supervision of bank holding companies. The Fed proposes two different standards, one for the 28 largest banking companies and another for the rest. But the basic idea is the same: Watch out for pay policies that undermine safety and soundness.
It’s important to separate the two missions of the banking compensation cops. One is political and the other is practical.
I can’t argue with the politics. It would be impossible for the White House or Congress to sit by if bailout beneficiaries like Citigroup, Bank of America, AIG, or General Motors started writing huge paychecks to top executives while the real estate market remained a wreck and one of every 10 American workers was unable to find a job. But that’s right now, and a limited number of companies are involved. Hopefully, everyone’s fortunes will improve with time.
Even Feinberg, speaking on television yesterday, sounded uneasy with the idea of government intruding on the pay policies of private companies over a long period of time. “I don’t think government should be in the business of micromanaging compensation across the board in corporate America,’’ he said.
So what about the practical mission? That’s harder to rationalize. Feinberg and others think much more modest cash compensation and increasing use of longer-term equity incentives will fix the problem. That’s just not the case.
Other chapters in the long history of reckless capitalism involved executives doing crazy things to boost the price of their company’s stock because they owned so many options or shares. Options became an important form of executive compensation before the 1990s stock boom on the theory they would align the interests of managers and owners. Problems and abuses followed.
Option-induced executive insanity occurred mostly at companies with stocks that had the capacity to increase many-fold. Shares of banks and other finance companies rarely have that kind of leaping power, but stock-related compensation can be badly abused just the same.
Regulators should focus on safety and soundness at America’s banks. Deal seriously with that and crazy compensation will fade into the background on its own.
Steven Syre is a Globe columnist. He can be reached at syre@globe.com. 
