Headlines shout about overly generous executive compensation packages. Some say it is disgusting, obnoxious and egregious. Furthermore, they want their elected officials to do something to curtail the high salaries, bonuses and commissions. Yet, calmer voices say it is none of the government's business. Rather, they view the government's role as being less invasive and want it to require more transparency instead. In that way the stockholders will know everything that affects their investments and they can make informed decisions.
Thus it no surprise that Goldman Sachs, the investment bank known for its excess, is having private discussions about executive compensation with its largest stockholders, according to press reports. Goldman believes that all the displeasure and outrage expressed by President Barack Obama, Congress and the public at large means very little. That is because it is unlikely that elected officials will micromanage compensation. Besides, it is a dangerous line to cross in a capitalistic economy and could have unwanted consequences. (A negotiated solution was reached after this article was written.)
The banking industry claims that they need to pay hefty incentives to attract the best and brightest executives and business development officers. In turn, as the theory goes, these talented individuals will outperform their peers and make more money for their companies. And when they do not live up to expectations, their compensation would be reduced or, even worse, they would lose their jobs.
But the theory can work better if it is easy for stockholders to vote on approval and removal of the company's directors. Congress and Obama can make it easier by empowering stockholders more and directing the Securities and Exchange Commission to monitor the process.
Additionally, Congress should reexamine the Gramm-Leach-Bliley Act passed in 1999. It allows bank holding companies to acquire financial institutions such as Wall Street financial firms involved with securities transactions. That was previously prohibited by Glass-Stegal, depression-era legislation that curtailed activities of banks.
Unlike the more staid FDIC-insured banks, Wall Street has a much higher risk and reward culture. The result is an amalgamated institution that acquiesces to Wall Street and rewards its executives and business producers more generously.
The merger of Bank of America with Merrill Lynch is the most recent illustration of the merging different cultures and paying outlandish bonuses. Blending the two cultures may take years to accomplish --- if it ever does work smoothly.
Capitalism works well during good times. Everyone can aspire to getting a bigger piece of the economic pie. Good times will return and the rhetoric about executive salaries will fade away.
Jerry Chautin is a volunteer SCORE business counselor, business columnist and SBA's 2006 national "Journalist of the Year" award winner, tenonline.org/sref/jc1bio.html. He is a former entrepreneur, commercial mortgage banker and business lender.
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