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December 15, 2010
Executive Compensation on Wall Street Remains Focused on Short Term
    by Robert Kropp

A report by the Council of Institutional Investors concludes that compensation packages on Wall Street contributed to the financial crisis, and that current pay practices are even worse.

A Bloomberg National Poll of 1,000 Americans published this week found that more than 70% of respondents favor a ban on large bonuses at Wall Street banks. Only seven percent said such bonuses were appropriate.

Unfortunately, those who are waiting for Wall Street to shoulder its share of the economic burden will have to wait longer, according to a recent report commissioned by the
Council of Institutional Investors (CII). The report, entitled Wall Street Pay: Size, Structure and Significance for Shareowners, was written by Paul Hodgson, senior research associate at The Corporate Library.

The study found that none of the six major post-crisis Wall Street banks "has addressed adequately the importance of tying compensation to long-term value growth." Furthermore, "More vigorous federal oversight of Wall Street does not appear to have changed compensation on the Street for the better."

The banks included in the study are Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo.

In the years preceding the financial crisis, "Wall Street's median total realized compensation levels were between two and three times the levels found in the rest of the Fortune 50," primarily due to large awards of non-restricted stock. "Many corporate governance experts," the report found, "Believe that the size and structure of these pay packages offered perverse incentives that helped drive the excessively risky decisions that pushed financial markets to the brink of disaster."

"Little or no Wall Street compensation was linked to long-term future performance measures," the report continued.

Although regulations addressing executive compensation at financial firms included in the American Recovery and Reinvestment Act (ARRA) "resulted in a less performance-related compensation structure," the report noted some improvements in compensation on Wall Street, such as improved clawback provisions and an increase in equity in executive compensation packages. However, "The effectiveness of the banks' stronger clawback provisions has not been tested," and "on balance, pay practices have worsened."

Of the six banks, only Morgan Stanley and Wells Fargo have introduced long-term performance incentives, according to the report, but even those practices were found by the report to be insufficient. At Morgan Stanley, for instance, only one-fifth of total compensation is tied to long-term performance, and the long term is defined by the bank as only three years.

The report advises shareowners to first identify those Wall Street banks whose compensation policies do not comply with best practice. Shareowners should then take advantage of their advisory votes on compensation, and follow such votes with engagement through letters and meetings.

"Concerned shareowners can also advocate vigorously for effective reforms before Congress and at the numerous federal regulators and agencies that now have a hand in overseeing bank pay," the report concludes.


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