President Obama called Wall Street’s outsize pay packages “shameful,” especially for companies in need of federal bailouts. Such pay, he said, is “exactly the kind of disregard for the costs and consequences of their actions that brought about this crisis — a culture of narrow self-interest and short-term gain at the expense of everything else.”
We have seen harsh calls around the world, even in countries such as India.
Rather than restricting pay and bonuses which is against the spirit of free markets and creates distortions, it is much more desirable to tie bonuses to long term performance. But it has side effects too.
The ‘Collosseum’ really for this debate has been the Wall Street, where the ‘Gladiators’ aka Investment banks have been slugging it out. Now, for ages these I Banks have reared these big bullies, the smartest people from B Schools, who demand to get paid a cut of the money earned by them. But this instant ‘Nirvana’ also led to the problem of Agency Costs, given the fact that there is huge churn, to and fro in these banks. You could make investment decisions based on the money earned in the same year, get paid a cut of the profits and not worry if the same investment led to an even bigger loss the following year, as you had already encashed and left the organization for greener pastures or even if you stayed put there is no negative bonus. Having deferred bonuses obviously would help to solve this problem.
However, I guess the non desirable side effect is visible too. For example how would you make sure that you get paid in case you are asked to leave next year or even if you decide to jump ship to another job? Would the unpaid bonus unfairly hold you back?
There are solutions like keeping the deferred bonus amount in escrow, but they increase administrative costs and complexity. I don't think anyone really understands what the fallout of such a plan would be. Another CDO, CMO in the making perhaps
We should perhaps have rating agencies to rate such plans :)
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