Wall Street Reform in Action: Banker Pay on Chopping Block

You wouldn't know it to listen to the freakouts from the extreme Right wing who think the Dodd Frank Wall Street reform law is the second coming of Joseph Stalin (or Hitler, or Mao, they can't keep their "isms" straight) or the fanatic whiners on the Left who think it was a big giveaway and surrender to the big banks, but Wall Street reform is working. I wrote this week about the consumer protection agency's steps to regulate non-bank and shadow-bank actors in the mortgage market. And now, thanks to the sunlight and 'say on pay' provisions on banker executive pay in Dodd Frank, Wall Street pay is heading to the chopping block as institutional shareholders demand accountability because of poor performance.

You see, banks have had kind of a bad year compared to the general market this year. And so...
While still lofty compared to the rest of the US, pay for some Wall Street workers will be the lowest in years, at a time when critics have been lashing out at what they deem excessive finance-industry compensation.

At Goldman Sachs, many of the roughly 400 partners can expect to see their 2011 pay cut at least in half from 2010, according to people familiar with the situation. Pay for some employees in the New York company's fixed-income trading business will shrink by 60%, with some workers getting no bonus, these people said.

Morgan Stanley is expected to shrink bonuses for some investment bankers and traders by 30% to 40% from 2010, said people familiar with the matter.
You don't say. Suddenly all that 'talent' pool Wall Street absolutely couldn't do without is willing to take a pay cut? We had nearly a decade of under-the-cover-of-darkness pay raises for Wall Street executives regardless of their performance (actually, in many if not most instances they seem to have failed upwards), and now all of a sudden their pay is getting some relationship to their performance? Who came up with this crazy idea that Wall Street's pay should have some sort of a connection to their performance?

It turns out that it was one of those socialist fascist corporate-sellout ideas from the President's Wall Street reform, and law did it smartly by shining the daylight on banker pay and giving shareholders a say, albeit an advisory one.
Investors ranging from charitable foundations to large state pension funds are preparing to challenge large financial firms on their pay practices. As a result, this year's "proxy season"—the period, usually in the spring, when companies hold annual shareholder meetings—promises to be an eventful one in the financial sector, compensation consultants and corporate-governance experts say. [...]

Thanks to the Dodd-Frank financial overhaul law, firms must hold nonbinding shareholder votes at least once every three years on their executive compensation policies. The biggest U.S. financial firms—J.P. Morgan, Bank of America Corp., Citigroup Inc., Wells Fargo & Co., Goldman Sachs and Morgan Stanley—each set plans last year to hold annual votes. All six last year received broad shareholder approval of their pay plans.

But a comfortable majority doesn't always translate into investor approval. An October survey of institutional investors, corporate issuers and industry peers showed that when shareholder support for executive pay falls below 70%, it "should trigger an examination," according to Institutional Shareholder Services, a proxy-advisory firm owned by financial-information company MSCI Inc.

Just 7% of the 3,000 large companies tracked by ISS fell below that threshold, said Carol Bowie, head of compensation-policy development at ISS.

One bank executive says company boards likely wouldn't adjust their planned compensation awards if a say-on-pay vote failed to garner 70% support, but he acknowledges that such a result could lead them to "tread carefully" on pay the following year.
I understand - and even to a degree support - the criticism of "say on pay" for shareholders being non-binding, but the key point here is the sunlight. Think about it carefully: is there really such a thing as a "non-binding" shareholder vote? If your shareholders - especially if a significant amount of them get together - want you to do something and you don't do it, they always have the option of selling your stock and plummeting your stock price. Not only that, the publicity garnered around ignoring significant shareholder sentiment can do as much damage to your stock value as the shareholder rage itself.

Given the pay cuts I noted from the Financial Times article at the beginning of this piece, I'd say the mere threat of shareholder outrage is having a pretty darn good effect on corporate bank boards. After all, when was the last time you heard of banker pay being cut by as much as half and vanishing bonuses on Wall Street?

Sunshine is the best disinfectant. Dodd-Frank may not have nationalized the banks like the uber-Left wanted it to (but had no idea where the votes for that would come from), but it gave shareholders the tools they needed to hold banks accountable. Republicans are fond of telling you about how you should care about Wall Street if you have any kind of a retirement or investment portfolio, and Dodd-Frank used that argument to give shareholders a say and to force companies to disclose executive pay to their shareholders.

The best reforms are not the ones that have no chance of getting passed. Neither are they the ones that rely on ideologically extreme (but factually deficient) beliefs of either an unregulated market or a socialized model of every economic sector. The best reforms are the ones that work. The reforms the President and the Democrats (in the first two years of Obama's presidency) have put in place are working for America.