Wall Street Pay: Where’s the Reform?

Today’s report on Wall Street remuneration practices from Kenneth Feinberg, the Treasury Department’s “special master” for executive pay, comes football jersey about a year too late. After being appointed in February, 2009, Feinberg took eighteen months to discover what we all already know: Wall Street is awash in egregious self-enrichment.

The headline in today’s report, which was trailed in the Times this morning, is that in late 2008 and early 2009, at the same time they were receiving hundreds of billions of dollars in taxpayer bailouts, seventeen of the big banks paid out about $2 billion in bonuses and other payments. In a press conference today, Feinberg said these payments were “ill-advised” and “against the public interest,” but admitted he had “no authority whatsoever” to recoup the money.

The bigger story is that virtually nothing has soccer uniforms been done to change the pay practices that Feinberg belatedly highlights. Despite widespread anger on the part of the public, and a rare consensus among economists that faulty compensation structures were partly responsible for the financial crisis, the U.S. political system has failed to rise to the challenge. The financial-reform bill that President Obama signed earlier this week contains a measure that would allow stockholders to vote on the compensation packages of senior executives. But this so-called “say on pay” will have little if any impact on how Wall Street firms pay their traders, which is at the heart of the issue.

As I pointed out in my book “How Markets Fail: The Logic of Economic Calamities,” the problem is not only one of greed—although that certainly plays a role—but of faulty incentive structures. Even today, most Wall Street firms pay their senior employees a not-too-outlandish salary (several hundred thousand dollars), with the bulk of soccer jerseys their compensation coming in the form of bonuses that are largely paid in cash or stock options. Such a system is meant to align the interests of employees with stockholders. In fact, it can easily have the opposite effect, giving traders and their managers a big incentive to generate short-term gains while ignoring longer-term risks.