Compensation structures at large banks bear no relation to their financial success or the performance of their employees, undercutting a central defense of the banking industry against restrictions on executive pay, according to a new report.
Released as part of New York Attorney General Andrew Cuomo's ongoing investigation into the cause of economic problems in the banking industry, the report found "no clear rhyme or reason" to why some banks awarded large compensation packages.
Cuomo's office examined historical data on corporate performance and executive pay at the first nine companies to receive government aid as part of the Troubled Asset Relief Program. They also interviewed executives, compensation consultants, and employees who received bonuses.
The team found similar behavior among differently situated firms, with all paying far more in bonuses than they reported in net income last year. Goldman Sachs Group Inc., for instance, turned a $2.3 billion profit in 2008 while paying out $4.8 billion in bonuses, while Morgan Stanley earned $1.7 billion and paid $4.4 billion in bonuses.
Companies that suffered large losses also paid large bonuses to their employees. Citigroup Inc. and Merrill Lynch & Co. each lost approximately $27 billion in 2008, with the former paying out $5.33 billion in bonuses and the latter $3.6 billion.
"When the banks did poorly, their employees were paid well," the report found. "And when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well. Bonuses and overall compensation did not vary significantly as profits diminished."
Critics have long said that executive compensation structures at major banks reward excessive risk-taking. The findings undercut a central industry defense, that the system is self-regulating because employees, as one industry executive cited in the report explained, "share in the downside when overall performance is weak."
If employees are rewarded no matter what happens, then the compensation structure would appear to present a temptation for employees to book risky investments, the report noted. "In other words," it said, "bank compensation structures lacked consistent principles and tended to result in a compensation system that was all "upside."
The attorney general's report recommended that the banking industry reexamine its compensation practices to bring them into line with stated principles. Should private actors fail to do so, Cuomo said, "such reform should be discussed as part of the federal regulatory reform effort, and, where appropriate, taken into account by the Obama Administration's pay czar.
Released as part of New York Attorney General Andrew Cuomo's ongoing investigation into the cause of economic problems in the banking industry, the report found "no clear rhyme or reason" to why some banks awarded large compensation packages.
Cuomo's office examined historical data on corporate performance and executive pay at the first nine companies to receive government aid as part of the Troubled Asset Relief Program. They also interviewed executives, compensation consultants, and employees who received bonuses.
The team found similar behavior among differently situated firms, with all paying far more in bonuses than they reported in net income last year. Goldman Sachs Group Inc., for instance, turned a $2.3 billion profit in 2008 while paying out $4.8 billion in bonuses, while Morgan Stanley earned $1.7 billion and paid $4.4 billion in bonuses.
Companies that suffered large losses also paid large bonuses to their employees. Citigroup Inc. and Merrill Lynch & Co. each lost approximately $27 billion in 2008, with the former paying out $5.33 billion in bonuses and the latter $3.6 billion.
"When the banks did poorly, their employees were paid well," the report found. "And when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well. Bonuses and overall compensation did not vary significantly as profits diminished."
Critics have long said that executive compensation structures at major banks reward excessive risk-taking. The findings undercut a central industry defense, that the system is self-regulating because employees, as one industry executive cited in the report explained, "share in the downside when overall performance is weak."
If employees are rewarded no matter what happens, then the compensation structure would appear to present a temptation for employees to book risky investments, the report noted. "In other words," it said, "bank compensation structures lacked consistent principles and tended to result in a compensation system that was all "upside."
The attorney general's report recommended that the banking industry reexamine its compensation practices to bring them into line with stated principles. Should private actors fail to do so, Cuomo said, "such reform should be discussed as part of the federal regulatory reform effort, and, where appropriate, taken into account by the Obama Administration's pay czar.
published July 30, 2009, 0 Comments
Leave a comment