27 Apr Lemonade for Banker’s Pay Cap
BEYONCE SIPS LEMONADE
This weekend, Beyoncé served up a large pitcher of Lemonade and Banker’s got new of a Banker’s pay cap. In case you didn’t catch the show on HBO or missed the avalanche of publicity that followed, I’ll spill some Tea.
Beyoncé is mad at her husband Jay-Z because he (allegedly) had an affair with this woman Rachel Roy. Not Rachel Ray of “I’m not a chef”-style cooking fame.
However, save the tissues, because it seems Bey and J are on the mend. Lemonade video can only be streamed through TIDAL, Jay-Z’s streaming video company. Grin…
BANKERS’ PAY CAP
Bankers pay cap is mess boots. But they may want to start squeezing those lemons because it’s very likely a cap on bankers’ total comp packages will be approved and become part of the Dodd-Frank Act of 2010.
The language has been listed for public comment (comments due within 90 days, July 21) before it becomes part of the mammoth Dodd-Frank Act.
The new pay cap proposal will apply only to senior management in areas taking risk and includes
A 4-year hold on 60% of total compensation
A 7 year clawback clause should anything go awry
If you want a mid-level dive, New York Times did a good overview, here.
For those wanting a deeper dive, read the NCUA link here.
SUMMARY & CONCLUSION
I don’t agree with regulating any aspect total compensation in an industry with Self Regulating standards via SRO’s.
Consider the kind of talent the banking sector will be able to attract. If we can balance that with enforcement by investigation and disciplinary bodies the industry shouldn’t be mandated by the government as to how performance should be apportioned. In a related post, I speak to enforcement concerns on a larger level.
Given the events of 2008, bonus payment models needed to be addressed.
They were a free option in the 1980s. Traders would either make a boat load of money and receive a bonus commensurate with their performance, or they’d lose a tone of money and lose their seat. Invariably, these people found employment elsewhere, often trebling their base pay along the way.
Many banks changed how bonuses were paid since the mid-naughts. Market makers (dealers) have long lived with clawback risk. The first large-scale clawback I recall was when Drexel Burnham went under and bankers were sued individually by leveraged borrowers. So there’s precedent for clawback but rarely enforced.
Self-regulation is my preference. If banks can’t provide ways of punishing irresponsible behavior, after the public comment period, banks’ total compensation packages and the way they’re handled will be in the regulators’ hands.
GLOSSARY OF TERMS
LEMONADE [lem-uh–neyd, lem–uh-neyd]
Making something good out of something bad (from the quote “When life gives you lemons, make lemonade”)
Bringing you up to date, sharing information
Making hurtful statements
MESSY BOOTS [mes-ee] [boots]
People are saying things that can affect your well being