Expert Perspective by Grahall’s OmniMedia Editor
An article published in Bloomberg on May 22, 2009 titled “Geithner Calls for “Very Substantial” Change in Wall Street Pay”, journalists Rich Miller and Robert Schmidt summarized Treasury Secretary’s Tim Geithner’s comments in a wide-ranging interview for Bloomberg Television. Not surprisingly, Wall Street pay practices were a central part of that discussion, with Secretary Geithner indicating that: “what’s needed is a broad set of standards that financial supervisors can use to make sure that [a financial crisis precipitated by Wall Street Pay practices] doesn’t happen again… the pay plan would be part of a proposed comprehensive overhaul of financial regulation…”
It appears that Secretary Geithner is raising flags of many kinds to see who might salute them, so he can better understand where support and opposition for various proposals might lie. Certainly, Wall Street’s pay practices have been under the microscope for several months now, and we would be hard pressed to find anyone who feels that compensation reform of some type is not appealing. But, when we reflect on government regulations, we are reminded that the first folks to benefit from regulations are often the consultants and the lawyers. Accordingly, the professional compliance community – well to be honest, our community – is likely to be big supporters (and benefactors) of any sweeping regulatory changes.
Larger consulting firms that have evolved from actuarial roots are well suited to dissect complex regulations and create cookbook-like operationalized solutions that they apply again and again. In a “prescriptive world” these large firms can be the most efficient at delivering standardized outcomes.
However, these large consulting firms also have a significant challenge: that of independence. In light of the publicity around executive compensation at places as diverse as McDonalds, Chesapeake Energy and Bank of America, it is ever more critical for Boards and Management to ensure that the advice they receive from their compensation consultants is not compromised by the desire of the consultant to win large projects or maintain relationships outside of the executive compensation arena.
Another consideration is that no sooner has the ink dried on sweeping regulations than are the deep technical specialists at consulting organizations hard at work to find the “loopholes”. While these loopholes tend to close over time, there is often as much as a two-year window where “creativity” abounds in the form of taking advantage of weaknesses in the law.
Carefully worded and thoughtful regulation coupled with reinforced independence rules could result in vast improvements in Wall Street’s pay practices. Having said that, the most important aspect of any pay program is that it rewards the types of behaviors that drive business strategy and safeguard investors and consumers (i.e. through appropriate risk management). Probably the only folks in a position to deliver effective compensation structures in the short term are the executives and the Boards of Directors at the remaining Wall Street firms. Only time will tell if their walk through the “TARP Pit” results in a better outcome than it did for those once hulking giants, Bear Sterns, Lehmann Bros. and Merrill Lynch, whose collective demise would have seemed unimaginable a mere 12 months ago. Perhaps the outcomes for those dinosaurs of high risk finance was enlightening enough to encourage other Wall Street firms to permanently change their ways – with the government’s assistance of course. If not, it’s pretty obvious to us that there will be highly effective market forces – big sticks in big hands – waiting in their path.
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