Wednesday, May 13, 2009


According to a report in the WSJ, the Obama Administration is considering getting involved in setting bank compensation policies. For example, loan officers should be paid based not only on the quantity of the loans made but also on the quality of the loans. Seriously, is this any different than the issues with most commission salespeople in most industries? Are they selling high margin products? Are they selling to customers with good credit? Are they giving away too much to get the sale? Is this the role of government? Of course not.

I have written it before, the issue is not the compensation policies. The issue is the leadership of the companies. The leadership must set compensation policies that drive the behavior and performance that they desire. The leadership must then identify the risks associated with its compensation policy and evaluate and monitor those risks. This is the responsibility of leadership not the government.

The government is quick to try to fix corporate issues based on the current financial crisis. Maybe it should fix its own house first. Artificially low interest rates for the five years leading into this crisis served to reduce the price of risk. Risky investments saw falling and low interest rates. These rates inflated the investment bubble across all asset classes. Compensation policies were part of the issue but not the largest part.

Cheers, Mike

1 comment:

  1. Mike,

    I'd like to get your opinion on how effective the government can expect to be in their efforts to regulate bank compensation. One example I saw recently was that Morgan Stanley increased base salaries to limit exposure to bonus criticism/taxes.

    In my opinion, industry will always find a creative (or obvious) way around compensation regulation.