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Did the Pay Czar Whiff?

I think Joe Nocera is being uncharitable here:

In other words, much of Wall Street has already moved to better align pay with longer-term performance. Firms have decreased the cash component, and increased stock awards, with strings attached that force them to hold the stock for long periods of time. But that isn’t exactly keeping pay down, which — and let’s be honest here — is what most of the country really wants to see, given how the nation’s bankers helped put us at the brink of financial ruin.

The executives affected by Mr. Feinberg’s ruling aren’t exactly going broke either. For instance, when you add up both the cash and stock components, 14 of Citigroup’s highest-paid executives still stand to make $5 million to $9 million each. And if the company eventually recovers, pays back the bailout money, and sees its stock rise, Mr. Feinberg’s decision to put so much of compensation into stock is going to create huge windfalls for them.

I agree that bankers are still paid way too much money. And it would have been nice if the recent pay reforms--whether the ones Feinberg implemented, or the ones firms like Goldman and Morgan Stanley initiated to preempt more scrutiny--had gone further to reduce pay levels rather than mostly just changing the structure of compensation to create better long-term incentives. But here's the thing: That really wasn't the point.

I know it sounds strange--who's going to slash compensation if not the pay czar? But, in practice, that's just not something you can do in isolation. Compensation reflects a firm's profitability, size, business model, competitors, etc., etc. You're just not going to abruptly decree that people making $2 million a year should instead make $200,000 a year when their firm is booking billions of dollars in profits and has all sorts of unregulated competitors (like hedge funds or foreign banks) who are equally profitable and can afford to pay multi-million dollar salaries.

Don't get me wrong: I'm not saying we shouldn't address this stuff. I'm just saying you shouldn't expect the pay czar to do it. If you want to really change executive pay, you have to reform the whole structure of the industry. You need to conemplate the sort of thing Paul Volcker is pushing, which is a modern-day Glass Steagall that would separate commercial banking (and some investment banking functions) from proprietary trading--which is to say, separate the banking parts of the business from the hedge fund parts of the business.

The problem today is that the hedge fund part of the business creates huge profits, which drive huge salaries, while the banking part of the business gives the firm access to the Fed's discount window (i.e., cheap, tax-payer subsidized borrowing) and requires the government to bail out the institution if it collapses (at least if the bank is big enough). Separating out the hedge fund parts from the traditional-bank parts would make it so that, if and when the government stepped in to save a bank, at least taxpayers wouldn't have to pay its executives outrageous salaries, too. (Salaries would be lower by virtue of its lower profitability.) But, again, that's not something a pay czar can accomplish. That requires legislation, which would prompt a massive smackdown in Congress. Unless you're prepared for that battle (and I'd be happy to see it), please don't whine about how the pay czar failed to lower executive pay.