Wall Street's efforts to quell public outrage over its pay practices could in fact be setting up its top executives, bankers, and traders for even bigger payouts down the road, which in turn could reignite the outcry.
To align pay with the long-term performance, banks are giving executives a larger proportion of their compensation in stock and are spreading the equity payouts over more years.
Wall Street is working hard to tweak the terms of compensation packages to ensure that traders, bankers and executives are not incentivized to take out-sized risks. Morgan Stanley is the latest to consider proposals to align pay with long-term performance, through measures like awarding compensation based in part on the bank's share performance relative to peers, the Wall Street Journal reported.
Goldman Sachs Group Inc plans to pay top managers their 2009 bonuses in stock rather than cash, to help deflect outrage over the more than $20 billion of payouts expected to be made to employees.
It is not clear what impact any of these actions will have on risk-taking on Wall Street. But one thing that is clear: these moves do not necessarily presage a new era of reduced pay in the financial sector.
If banks like Morgan Stanley and Goldman Sachs Group Inc continue to rebound from the financial crisis, their shares could surge and their newly designed compensation plans could mean extra big pay-days years from now.
"It may very well work out to be much better for the executives, if the companies perform well," said Kenneth Raskin, the head of law firm White & Case's executive compensation practice. That in turn could lead to more public outcry over pay in the financial sector, which received more than a trillion dollars of government support in 2008, experts said. But experts said that what is upsetting many Americans is the notion that whatever the formula that major Wall Street firms use to pay employees, their losses are socialised while their gains are privatised.
"Main Street doesn't care whether it is deferred stock or restricted stock, or whether 75 percent of it is kicked down the road," said Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University.
"All they care about is these guys are making tens of millions of dollars." An obvious solution to this problem is to regulate major banks to the point where they are more like utilities. Presumably, when financial companies are taking less risk, their returns on equity will be lower, and their pay packages will also be lower. But Wall Street is fighting regulation ardently, through for example, keeping as much derivatives trading as possible off exchanges and away from clearing houses. Another compensation practice that may help calm public anger is "clawing back pay," which forces executives to pay back money they received during good times if the bank subsequently racks up big losses.
Morgan Stanley is considering having most of the top 30 Morgan executives submit 65 percent or more of their pay to clawbacks, the Wall Street Journal reported.