Monday, April 20, 2009


Bloomberg reports that the Service Employees International Union pension funds has sent letters to 29 large financial institutions that it has investments in, demanding that those companies take actions necessary to recoup excessive incentive compensation previously paid to executives based on inflated earnings that were subsequently written off. Well, this will turn up the heat on Wall Street compensation.

The Street is already under fire from various corners for compensation levels that are far and beyond what others make (except for Major League Baseball players, who should beware). The Union threatens lawsuits if suitable actions are not taken. This may wind up being a real mess.

First of all, there is no doubt that a certain percentage of the executives that received excessive pay should be scrutinized. However, I believe that percentage is quite low. The vast majority of the executives were hard working individuals from all types of backgrounds. Further, many of these executives were paid substantially in the form of equity, much of which is either worth less or worthless.

Second, many of these executives had other alternatives to make at least as much with other organizations, including hedge funds, but were compensated highly to stay. I know, you are thinking, 'wouldn't it have been cheaper all around to let them go'.

Third, many of these same executives lost significant sums of their investments outside the equity in their employers. In fact, Goldman had to extend loans to many of their people in the first quarter to cover capital calls from some of their investments. Could be hard to get something back that isn't there anymore.

Fourth, I wonder, 'what are the tax considerations of giving money back?' They paid taxes when they received the compensation. I am not a tax guy, but, I don't think they get a deduction for giving the comp back.

Finally, the so-called guilty ones should be pressed to return some of their compensation, but it is probably a small number of people. I would advise them to focus on the enormous pay packages received by some of the disgraced, departed CEO's, but then, I am sure one of our attorney friends would say, 'on what legal basis?' Yes, this could get very sticky. Oh and by the way, they really were overpaid at almost all levels including those just out of school. Somehow over time, it just became the norm, however out of touch of reality it was.

Cheers, Mike

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