I'm not going to stand here (er, sit here) and tell you that there are no issues with the level and design of executive compensation or the way bonuses were paid at some Wall Street firms. To use a well-turned phrase from a recent Hay Group missiveon the topic, "incentive plans that focus on the short term, that take no account of risk and that drown rational thought with life-changing sums of money" have certainly proven themselves to be no recipe for success. But before we leap to paint all incentive pay with the same broad brush of condemnation and send the pendulum swinging too far in the opposite direction, I'd like to suggest that some calm, rational thought about the steps we are taking might be in order.
Geoff Colvin, senior editor-at-large of Fortune, shares some thoughts in a recent article on whether the pay restrictions added to the stimulus bill may create bigger problems than the ones they were intended to solve:
The main reason they'll backfire is that they make pay for performance, otherwise known as bonuses, illegal beyond a modest allowance, yet they permit unlimited pay for nonperformance. An executive may be paid a guaranteed base salary of any size but may not receive a bonus exceeding one-third of total pay. And even that minor bonus cannot be based on profits; the rules prohibit any pay plan "that would encourage manipulation of the reported earnings" of the firm, which is of course what any plan based on profits would encourage. So paying top executives in any sensible way is forbidden.
Colvin's concern: that the net effect of these provisions will be to drive the most talented financial minds away from the institutions who need them the most. Those choosing to remain will be those content with a comfortable (or comfortable plus) salary and not much upside for producing results.
While it might be somewhat cathartic to put the screws to the financial sector, let's not forget that a strong financial industry is an essential piece of finding our way out of this mess.
What do you think?