My new column, on Washington’s campaign to regulate executive and Wall Street pay, is online. It’s got a lot of Lucian Bebchuk in it, and this morning Bebchuk is at it again, with a WSJ.com op-ed (co-authored with his Harvard Law School colleague Alma Cohen) making the case that it appears banks have actually gotten more generous in doling out big paychecks to top employees than they were before the financial crisis.
[D]uring the past two decades, compensation in finance has increased relative to other parts of the economy, and the financial sector has attracted an ever-increasing share of the country’s best and brightest. Following the financial crisis, there is widespread recognition that, in the post-crisis world, finance should command a smaller share of these best and brightest. To the extent that relative pay in the financial sector remains at or above its lofty precrisis levels, the desirable adjustment in the allocation of talent will be impeded or delayed.
So what do you do about it? Bebchuk wants bank regulators banning certain kinds of incentive-pay packages (and appears to have persuaded House Democrats of the wisdom of this approach). In my column I talk about using the tax code—the boom in Wall Street pay came after the top income tax rate was slashed in the 1980s, so raising tax rates on those in the $1 million-a-year-plus range might turn back the clock at least a little. Floyd Norris, in his NYT column today, quotes Ohio State finance professor Rene Stulz arguing that:
Properly designed capital requirements are a much more efficient approach to regulate the risk of financial institutions than fiddling with compensation.
Higher capital requirements would also reduce profitability, thus presumably cutting into pay—so it’s sort of a backdoor way to fiddle with compensation.
Finally, compensation consultant David Leach had this to say when I talked to him Tuesday about both Wall Street pay and executive pay at non-financial corporations:
Companies have to step back and think about what’s right for the business. Maybe it’s time to start thinking more about a team and we’re all in this together rather than individual producers. … It’s really got to be a culture change.
Not that he sees any real indication of this shift yet in corporate America:
I’m noticing that nobody wants to step forward and everybody is kind of waiting to see what happens. Nobody wants to be the example.
Which explains why Congress feels compelled to fiddle with compensation, I guess.