Trader’s Narrative

Executive compensation is one of the glaring issues at the heart of the financial crisis. We haven’t even come close to dealing with it in a meaningful way as the powerful Wall St. lobby moved quickly to throw obstacles in the path of any regulation or even discussion of the matter.

The most common argument that is trotted out to defend the obscenely disproportionate compensation packages on Wall St. is that the bonuses, salaries and stock options are needed to keep ‘talent’. But no one is able to ask how ‘talent’ that nukes the global financial system and brings down once mighty investment banks is worth even a shiny dime.

A look at the global bank CEO compensation also throws cold water on this non-sequitur:

Source: Reuters

The only non-US bank that approaches lofty compensation levels is Santander. Since the graph above shows the compensation and the market capitalization of each bank, I thought it would be interesting to show the relative compensation, so here is a graph of that:

There is incredible variation in executive compensation around the world with many very large banks being run by CEOs who are paid next to nothing (compared to US counterparts). So are they stupid to stick around? or is the North American mindset wrong?

I’m not really in favor of a government cap on compensation. But regulation is needed to bring salaries and bonuses in line with performance. And they clearly are not right now. The industry itself nor the market is going to deal with the agency issue at the heart of the matter. Shareholders theoretically are in control but in reality, there is so many layers of bureaucracy insulating them and the compensation committees appointed by the CEOs that no one really believes in this free market fairy tale anymore. A third objective party needs to step in and rescue Wall St. from themselves for the good of all.