Compensating Interests

Everyone’s looking at controlling compensation.

One of the stories that people like to tell about the credit crunch has to do with compensation. Because a bunch of kids were paid too much too fast, the story goes, they were effectively incented to gamble with house money. When they lost big-time, the Treasury had to pick up the tab. Never mind if this is true-but it makes a nice story.
So now the government is looking to limit pay, not just for TARP recipients, but for everybody in finance. Now, over the years a lot of uber-smart people have tried to align the interests of executives and shareholders Maybe the bright minds at Treasury will discover the perfect formula that has eluded everyone else. But I suspect that they’ll have an easier time spinning straw into gold than holding down a deal-maker’s compensation.

Because we live in a global financial market, if U.S. banks can’t pay enough, someone else will. On the margin, talent will migrate to the activity and locale where it is best rewarded. If the Feds penalize performance, then the performers just won’t show up. Is that really what we want?

Douglas R. Tengdin, CFA
Chief Investment Officer
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