Late last week, the Fed pulled in the reins on bankers' pay to control capital risk and directly influence compensation at 5,000 financial institutions. To many, it was an action that was deemed as necessary given the inexcusable arrogance of these corporate high-fliers who received millions, maybe even billions of dollars in pre-bankruptcy bonuses, and following bankruptcy, billions more in TARP bailouts.
The Fed has placed themselves in the position of "approving" pay rates for ten of thousands of employees all across the nation, as revealed in a recent WSJ article, "Bankers Face Sweeping Curbs on Pay." For the very first time, bank's corporate boards and executives would be superseded in their pay decisions by the Federal government.
Though we were well aware this new proposal was imminent, in the new proposal the Fed could reject any compensation policies that it believes encourages bank employees to take on too much risk for a variety of jobs including including CEO, traders, loan officers. Rates of pay won't be set by the bureaucrats, but upon review they have the authority to amend each bank's salary and bonus policies to control unintended harmful incentives.
"The Fed's latest move marks another striking exertion of power by the nation's central bank since the financial crisis struck with ferocity two years ago." The WSJ reported. "It has bailed out firms such as American International Group Inc. and has flooded the financial system with money."
The Fed's strategy seems to go further than expected because of the wide range of job levels that it effects. Democrats who've adopted the "rallying cry" of corporate greed and excessive bonuses in failed financial institutions applaud the new proposal. Republicans argue that the Fed is becoming too aggressive by exerting itself to inject government regulations deep into compensation decisions in the private sector.
"Clawbacks," or provisions to reclaim the pay of employees who take risks that result in financial losses to their employers are a part of the plan. The Fed can also regulate the mix of pay packages, demanding that more pay be offered through restricted stock or "other forms of long-term compensation designed not to reward short-term performance."
Before they went bankrupt and became TARP recipients, AIG, Washington Mutual, Citigroup and GM continued to pay their employees highly competitive pay packages. Yet, another story that didn't receive much attention last week was "GM Ends Pay Cuts for Salaried Workers."
How can it be that the government-owned GM fully restores pay for their salaried workforce using taxpayer funds while the Fed rolls out this program to control pay in 5000 private sector, financial institutions? I haven't read anything about government controlling the pay rates for 29,600 salaried GM workers, just that they were "re-instated" after four months of being cut.
"We need to keep everyone motivated," spokeswoman Brenda Rios commented. "This is the group that's going to carry the new GM forward."
I don't get the difference. Why don't bankers need to be motivated? Why would the government, who now has control and ownership in both sectors, treat these businesses so differently?
Few people realize that the Fed already had the ability to control compensation in financial institutions before the financial meltdown on Wall Street. They looked the other way until the time was right to leverage their influence and politicize the issue.
I'm not a supporter of exorbitant pay packages for employees, but I am a believer in the free market system. I don't like the idea of Uncle Sam telling me as an employer what I can pay my people. That's why some banks have paid back their TARP funds as soon as possible; they don't think the money they received is worth the government interference and control.
Shouldn't the Feds be responsible for not stopping these excessive pay packages for bank execs before these institutions went bankrupt? I wonder how the bureaucrats would feel about clawbacks for their own pay packages?
Becky Regan is the founder and President of Regan HR, Inc., a human resources consulting firm specializing in compensation consulting for California employers and purveyor of online HR products. A former Corporate Human Resources Director (10,000+ employees) with more than 25 years of HR work experience in many industries, her team works with private, public and non-profit clients. Becky is passionate about designing HR programs and compensation plans that build organizations.
Maybe it's because they want to incent GM engineers to be more creative, whereas the bankers have been creative enough. . .
Posted by: working girl | 09/23/2009 at 03:43 AM