Even the measures cited in the proxy for rewarding Dimon and Drew are not risk-based. While a spokesperson for Citi (C) (which received a no vote on pay this year) wrote in an email that "Citi has continued to enhance the ability of the firm to reduce risks through its compensation programs," J. P. Morgan, Goldman (GS), Bank of America (BAC), and Morgan Stanley (MS) declined to discuss their pay practices for this article. No wonder. An October 2011 report by the Federal Reserve confirms that the use of risk-based measures at the large banks is "uneven" and every bank has more work to do. "Substantial work remains to be done to achieve consistency and effectiveness … in providing balanced risk-taking incentives," the report states. Put simply, bank boards need a kick in the pants.
Who will step up?
The FDIC put out an advanced notice over two years ago asking for comments on proposing a rule that would charge banks more for depository insurance if their pay programs were risky. Such a measure could have been a real impetus to fix pay. But, "to date, there has been no follow-up to the advance notice of proposed rulemaking," an FDIC spokesperson recently emailed me. And Martin Gruenberg, acting chair of the FDIC, did not address pay or such a proposed rule in his prepared testimony before the Senate last week.
The Office of the Comptroller of the Currency (OCC) is getting beat up these days. They had staff in London where the J.P. Morgan traders were located. An OCC spokesperson explained to me by email that while their staffers review trading data daily or weekly, "even a strong risk management culture could have surprises or breaks, but they should not be of significant magnitude relative to the banks business." Regarding pay, "the [sound compensation] guidance stands as what the examiners are using to supervise banks."
[315 words]
[计时5]
Last week, in his remarks before the banking committee, OCC head Thomas Curry mentioned"the need to ensure that incentive compensation structures balance risk and financial rewards and are compatible with effective controls and risk management."
Daniel Tarullo testified on behalf of the Board of Governors of the Federal Reserve. But his prepared remarks did not mention compensation. This, despite the fact that the Fed has oversight responsibility for top executives' pay. The Fed's October 2011 report outlines that bank pay "should achieve substantial conformance with the interagency guidance by the end of 2011 (affecting the award of incentive compensation awards for the 2011 performance year), and should fully conform thereafter." Neither the OCC nor Federal Reserve would comment, however, on their examinations and assessments.
The silence, especially from the Fed, is deafening, particularly since the banks' compensation fixes seem to have been done for only some managers rather than the top executives.
But pay programs for top executives matter most because their motives will influence their instructions and other managers' actions. (While the reverse is not necessarily true.)
The October 2011 report by the Federal Reserve states that incentives "were a contributing factor to the financial crisis that began in 2007." The M.O. among do-nothings is that losing billions isn't necessarily concerning for a bank the size of J.P. Morgan. I don't agree. Just because this isn't the 100-year flood doesn't mean we shouldn't repair the levy. How many breaks will we tolerate until we fix it?
Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://thevaluealliance.com), a board advisory firm.
[264 words]
