Headlines all over the media scream about the billions of dollars to be paid in Wall Street bonuses, as well as the push by government officials for AIG (AIG) to scale back its planned bonuses. We have heard the cry for compensation reform many times since the financial market crashed, but nothing seems to be done about it.
Can administration pay czar Kenneth Feinberg truly be effective in getting Wall Street pay in line, or is it really the responsibility of the shareholders? In actuality, the pay czar probably won't be able to do anything. But we do know that the people helping to pay for these bonuses are Main Street customers who are charged higher and higher fees and higher and higher interest rates. These are the same taxpayers who helped bail out Wall Street. Would these banks still be in business without the government's bailout money? Some probably wouldn't.
Banks continue to jack up all kinds of fees, especially fees on ATM transactions and overdrafts. Many banks have raised interest rates on the credit cards of even their best customers by 6 percent or more. Even though I have an excellent credit score and I've never paid late in my life, I know all my credit cards had interest rate increases of 6 percent or more. Some of us are able to avoid paying those ever-increasing interest rates by paying balances in full, but what happens to those who can't?
Let's get back to those bonuses. I'm sure no one wants the government to be setting corporate salaries, but the government does have a responsibility to investors to ensure shareholders have a voice in how executives are compensated. In fact, in a 2006 study called, "CEO Compensation, Shareholder Rights, and Corporate Governance: An Empirical Investigation," researchers concluded, "Our evidence reveals that CEOs of firms where shareholder rights are weak obtain more favorable compensation. Higher CEO pay is associated with a higher degree of potential managerial entrenchment ... Given the empirical evidence, we argue that CEO compensation practices reflect rent expropriation rather than optimal contracting."
This entrenchment can be seen in the planned 2009 bonuses. While the 2009 bonuses of these Wall Street executives are expected to exceed those at the top of the 2007 bubble, according to The Wall Street Journal, how many shareholders can say the same for the value of their stocks? I looked at the share prices near the top of the bubble in May 2007 and compared them to today's share prices. In May 2007, Morgan Stanley's (MS) shares were worth $66.63; as of Monday's close, the share price was $31.14. Goldman Sach's (GS) shares in May 2007 closed at $225.77; as of Monday's close, they were $187.23. Citigroup's (C) shares in May 2007 closed at $50.2; on Monday, they closed at $4.83. Bank of America (BAC) shares closed at $45.44 in May 2007; on Monday, their close price was $17.81. The only bank that is even close to its May 2007 closing share price is JPMorgan Chase (JPM), which closed at $48.42 at the end of May 2007 and closed at $45.66 on Monday.
Shareholders in every one of the banks that The Wall Street Journal surveyed have lost money. Do you really think executive bonuses at these banks should be climbing above the level of 2007 bonuses?
The only way to get bonuses under control is to give shareholders a vote on executive pay packages. Corporate boards should be forced to make a case for their proposed compensation packages and shareholders should be allow to vote them up or down. Until we see more involvement by shareholders on the pay packages of executives, we'll continue to see these abuses in executive compensation. I doubt the pay czar will be able to have any truly significant impact.
Lita Epstein has written more than 25 books, including Reading Financial Reports for Dummies and Trading for Dummies.
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