Has the Wall Street Pay Czar Paid Off?

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Time to say Goodbye to the Pay Czar

Nearly a year and a half ago, Kenneth Feinberg was appointed to overseeing the pay of Wall Street executives and top officials of other companies that had to be bailed out in the financial crisis. Today is most likely his final day on the job of any consequence.

This morning Feinberg released the results of a review of what the 419 banks that received government assistance paid their top executives in the year leading up to the financial cirisis and during. Perhaps surprisingly, Feinberg found that most banks paid their executives appropriately, rewarding them when reward was due. Only seventeen of the companies doled out wildly excessive compensation to top executives for little or no reason at all. Unsurprisingly, included in that list are the mainstays of Wall Street: Citigroup, Goldman Sachs, JP Morgan, Morgan Stanley, Bank of America (i.e. Merrill Lynch). All told, the 17 firms handed out $1.6 billion in what Feinberg calls “ill-advised” payouts.

Feinberg is now moving onto the Gulf, where he’s got another tough job ahead of him. He has been appointed in charge of handing out compensation from the BP fund set up for people and companies impacted by the oil spill. But on his last day on the job policing Wall Street pay, it’s time to ask how well he did. Huge pay checks that seemed to have no relation to long-term performance or risks was one of the main factors leading up to the financial crisis. So did Feinberg do a good job of changing the-pay-for-no-performance culture on Wall Street? I’m not so sure. Here’s why:

Feinberg has been brought in on a number of high profile cases where there is a pool of money to be distributed to victims: Agent Orange, 9/11 and now the Gulf. But the Wall Street pay czar had an added dimension to the job that the others didn’t. Feinberg was not only supposed to set the pay that these bank executives would get, he was also supposed put forth a frame work for how Wall Street executives should best be paid so that we don’t have a situation again where investment bankers and traders would be driven to do deals that would produce huge short-term profits, but create the potential for even larger losses down the road.

So how well did he do in changing the way Wall Streeters are paid? Mixed at best. Nearly all of the Wall Street firms have in the past year instituted clawbacks. That’s a good thing. But I recently heard from a recruiter that said guaranteed paid packages are back. And firms are offering them for junior bankers as well. That’s a step away from the pay for performance culture that Feinberg was trying to create on Wall Street. Bonuses at Goldman are down this year, and they paid their top executives exclusively in stock last year. But Goldman at least so far seems to be setting aside a larger portion of its revenues this year for bonuses than last. In a year when its earnings are dropping that doesn’t seem right.

For his first review he was just looking at the worst of the worst, banks and AIG and the car companies that pretty much everyone things would have failed if not for the government’s help. (Bank of America could be the one exception because they might have not done the Merrill deal if there was no backstop.) Feinberg could have come in and said these are failed firms with failed management. No one is making more than $500,000 in total pay. But he didn’t do that. From the beginning Feinberg said he wanted to strike a balance between what was fair pay and not making all the executives run for the hills. I caught up with Feinberg back in October when he was releasing his initial findings for an article that ran in TIME. Here’s what I had to say at the time:

In the end, he [Feinberg] made more changes to the way executives get paid than to how much. That has disappointed some critics. Feinberg ended up boosting many of the executives’ base salaries from last year’s, though not as much as the firms requested. Total compensation dropped, but to most people, it will look like Wall Street pay as usual. Eight of the 12 highest-paid executives at Bank of America will get more than $5 million for their work in 2009. At Citigroup, 14 execs will get at least that much.

Here’s what Feinberg told me at the time:

“Are these pay packages fair? I had to balance the need for these companies to pay back what they owe taxpayers,” says Feinberg. “Others may have balanced things differently, but I did what I thought was right.”

But I think in striking that balance, Feinberg blunted the long term affect he has had on Wall Street. If he had dramatically reigned in pay at the firms he had say over it could have had a ripple effect that brought down pay all over Wall Street. If Citi’s top executives don’t make more than $500,000 each, why should anyone at the firm. And if no one at Citi makes more than $500,000, then why should any other firms be paying so much more. Perhaps there wouldn’t have been a pay ceiling, but the standard might have come down. Or maybe if Feinberg had done that, everyone would have fled Citi and Bank of America and we wouldn’t be seeing the turnaround that both of those firms (however slowly in Citi’s case) seem to be having. And Wall Street and taxpayers would be in worse shape. Unfortunately, or fortunately, we will never know.