Column : Say on pay

This could be a harbinger for new things to follow as regards compensation and bonuses for bankers. As a former banker, I am glad that there is an Act now that helps manage the compensation of top management in banks. One of the most egregious compensation packages that were offered, but which did not receive the kind of notice and loath that it needed, was Goldman Sachs? compensation to its top management in early 2008 even when the investment bank got a $10 billion dole-out from the US government through the TARP programme. The compensation offered to the top five executives in Goldman Sachs that year was: $70.3 million for the chairman and CEO, Lloyd Blankfein; $62.5 million for the president, Gary Cohn; $61.5 million for the chief operating officer, Jon Winkelried; $58.5 million for the chief financial officer, David Viniar; and $49.1 million for chief administrative officer, Edward Forst. More than $300 million was paid to the top five executives even when the bank was reeling under the financial crisis. This egregious compensation was too high even by investment banking standards and, I remember, it was startling enough to start off conversations around the water cooler, but unfortunately it received little attention outside the investment banking world as the major emphasis then in the financial media was on the continuing financial crisis.

However, on second thoughts, it seems that it did catch the attention of the US regulators and lawmakers. Because, as part of the legislative response to the financial crisis of 2008, the US Congress mandated that beginning in 2009, all financial firms receiving TARP funds conduct shareholder ?say on pay? votes, i.e. the shareholders will have a say on the pay packages of top five executives. Then, as part of the Dodd-Frank Act, the mandate was extended to all US public companies, with ?say on pay? votes required for shareholder meetings at larger companies. Even smaller public companies beginning in 2013 are required to have an advisory vote on prior year?s compensation of the corporation?s top five executives. I think this vote on executive packages would alter the role of shareholders in corporate governance and pay practices for good.

The ?say on pay? may bring new dynamics into play in future but raises a few concerns. First, a legally-mandated shareholder vote on executive pay, whether advisory or binding, would upset the balance of authority between the corporate board and shareholders. This is because the ?command? mode of organisation chosen by modern day public corporations is the board, and a vote on compensation may upset the efficiency of board-centric corporations. Second, it is a big assumption to make that shareholders would do their homework and would be able to discern poorly-designed pay packages. Of course, there are advisory firms that provide corporate governance solutions including advisory on top-level executive compensation. But the services of these advisory firms would be affordable only by the institutional investors and not by the common shareholders. Even if they could afford, it is unlikely that shareholders would give individualised attention to compensation schemes at thousands of smaller public companies.

Furthermore, the ?say on pay? bill would mandate a vote for companies that do not have a problem. This potentially subjects these boards and companies to increased pressure and damages from interest groups that they do not incur today. One can imagine politically-oriented shareholders attempting to make political statements through ?say on pay? votes. This may increase the power of proxy advisory firms on corporate governance and compensation, whose purportedly one-size-fits-all recommendations would be followed blindly by institutional shareholders. The management will thus become shackled by shareholders, undermining their discretionary authority. On top of that, the recommendations of these advisory firms could be biased, as these firms may provide consulting to management on adopting pay policies.

Despite the concerns, the ?say on pay? should be seen as a step in the right direction towards shareholder primacy. It may help boards overcome psychological barriers and negotiate pay packages with CEOs more effectively on behalf of shareholders and is a natural step in curbing bonus excesses. It may create more transparency and accountability in the corporation, and thus presumably greater efficiency and social responsiveness. A bank reducing job counts for cost-cutting while the top executives pocket ginormous bonuses doesn?t seem right or socially responsive. For too long, CEOs and bankers have set low ethical standards for their own compensation and lawmakers have let them do that.

The author, formerly with JPMorgan Chase, is CEO, Quantum Phinance