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In this entry I examine executive compensation within the financial services industry. Based on my research and an interview I conducted, I argue that excessive pay for top management is still a problem on Wall Street and outline what we can do to rectify this situation.
The controversy surrounding executive compensation in the financial services industry emanated following the 2008 global economic meltdown. After seeing banks that had previously raked in spectacular profits suddenly fall fast and lose billions, people began questioning every action of these financial institutions, including the exorbitant salaries and bonuses their top members were receiving. Lehman Brothers Chairman and CEO Richard Fuld Jr. made $34 million in 2007; the company would file for Chapter 11 Bankruptcy in 2008. American International Group chief executive Martin Sullivan received a $14 million compensation package in 2007; the insurance corporation would require an $85 billion federal bailout just a year later. Founder and CEO Angelo Mozilo of Countrywide Financial, which later emerged at the forefront of the subprime mortgage crisis, cashed in $122 million in stock options before his departure. Evident by the faltering performance of their companies, these executives were by no means entitled to the compensation that was handed to them. Following the 2008 financial panic, regulators would wave red flags regarding the high compensation within banks and many CEOs were brought before Congress in hearings dealing with excessive pay within the financial industry. In a report released in July 2010, Kenneth R. Feinberg, President Obama's head attorney for executive compensation, found that nearly 80 percent of the $2 billion bonus pay in 2008 was unmerited. Despite the "crack down" on executive compensation, the Federal Reserve, in a compensation review of the country's 28 largest financial institutions, found that many of the bonus and incentive programs that economists say contributed to the financial crisis remain in place. Before these exorbitant commission structures once again lead the country into a financial panic, we must address why this is continuing to happen. How are executives continuing to benefit from such high pay and what can we do to stop this from occurring?
According to an article in Bloomberg, the four New York-based investment banks handed out a total of $84.4 billion in bonuses to its 598,072 employees for 2010, an average of $141,192 per worker. Goldman Sachs CEO Lloyd C. Blankfein received $19 million in compensation in 2010 and Citi's top 15 executives raked in $50 million in stock-based
compensation.
Although excessive executive compensation was targeted as a primary influence behind the 2008 financial collapse and although banks have not earned a
significant return for their shareholders in terms of stock price since then, top management still feels entitled to enormous commissions. The main reason that executives are able to get away with their self-serving philosophy is because our financial system fails to hold these executives accountable for their actions. As Charles H. Ferguson, the Director of the Academy Award winning documentary Inside Job, stated during his acceptance speech, "Not a single financial executive has gone to jail, and that's wrong." The punishment does not seem to fit the crime on Wall Street.
read more Executive Compensation: It Continues to Plague Us - Tarun Jain
