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摩根大通交易巨亏折射出的高管薪酬问题
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In The Devil Wears Prada, Meryl Streep's character Miranda Priestly says she lives on hope. I know what she means. But sometimes, I wonder how long we can live that way. We keep paying for the bank's messes. We pay for the government hearings and investigations, the losses in our retirement accounts, the negative impact on the economy, and in many other ways.
J.P. Morgan (JPM) CEO Jamie Dimon testified before the Senate Banking Committee this morning. But in all the hullabaloo and consternation about the bank's oversized bets, only a minute or two was spent on incentives. Sure, J.P. Morgan's proxy has something to say about pay and risk. The company is required to address such things now. And what it says is that "regardless of the motivation," the bank's "risk discipline" and "frequent risk reporting" has "excessive risk-taking" under control. Well, that didn't work so well at Fortune's most admired megabank and No. 22 most admired company in the world.
Despite what Dimon said this morning, it's important to remember this is not an isolated mistake. Bloomberg reported last week that a court appointed monitor is seeking consumer inputrelated to ongoing foreclosure abuses. And the senators at the hearing asked for help for constituents that are being told their paperwork is missing. To his credit, Dimon said the bank would look into the paperwork issues.
But poor oversight is a management and governance deficiency. The billions of dollars in trading losses is merely the most recent example of poor risk oversight at the largest banks
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On May 10, J.P. Morgan disclosed its immense trading losses. But on April 6, a hedge fund manager told the Financial Times: "The thing I'd be questioning, though, is why JPMorgan has such a big directional position when banks aren't supposed to be prop trading any more." And Bloomberg reported on April 9 that "four hedge-fund managers and dealers say the trades are big enough to move indexes and resemble proprietary bets, or wagers made with the bank's own money." If outsiders understood the size of the gambles back then, where were the bank's senior managers and its board? Why on April 13 did they not understand the magnitude, as Dimon testified this morning was the case?
When I speak with board directors, risk managers, and consultants who work with some of the largest banks, they agree that there is still a lot of work to do when it comes to risk oversight. And if Congress wanted to get the real picture, that's who they'd be talking to -- along with other observers who know the score. Not that everyone would be forthcoming, but if Congress asked the right questions, they would get the facts about the bailed out banks soon enough.
Exec pay days, for all the wrong reasons
But let's focus instead on motive and the all too obvious fact: incentives matter. If you pay for the wrong reasons in the wrong form, you'll get the risky behaviors you encourage. We shouldn't be surprised.
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Jamie Dimon became CEO of J.P. Morgan on January 1, 2006. The latest J.P. Morgan proxy shows that Jamie Dimon holds shares (and equivalents) worth over $200 million based on the company's closing price June 8. If the stock price rose to where it was just five years ago, his net worth would jump by $75 million.
A similar pop would net Ina Drew, former chief investment officer at the bank, over $23 million, if you include her deferred compensation and unvested shares. Drew oversaw the unit responsible for the large losses and reported directly to Dimon according to the testimony this morning. As in years past, the board gave Dimon and Drew's pay primarily in stock and options-based awards. Those items alone totaled $17 million and $8.5 million in 2011, respectively.
So what really drives their behavior? And what message is the board sending when they pay their executives this way?
This kind of high pay is exactly what a December New York Fed staff report warned could encourage risky CEO behavior and create economic distress. (Ironically, Dimon sits on the NY Fed's board, although a petition for his removal has garnered over 36,000 signatures.)
In contrast, sound compensation guidance from the regulators recommends risk-based measures, which put a company's and its employees' performance in the context of the quantity and quality of the risk that's taken on. Though banks claim to use risk-based measures, stock price is still the biggest determining factor in top bank executives' actual rewards. But goosing a company's stock price and taking rational risks are not exactly close companions. Former CEO Dick Fuld at Lehman Brothers was the poster child for this issue.
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