{"id":2726,"date":"2010-12-21T08:12:08","date_gmt":"2010-12-21T15:12:08","guid":{"rendered":"http:\/\/www.jasonapollovoss.local\/?p=2726"},"modified":"2018-08-17T08:34:56","modified_gmt":"2018-08-17T12:34:56","slug":"aligning-incentives-at-gargantuan-banks","status":"publish","type":"post","link":"https:\/\/jasonapollovoss.com\/web\/2010\/12\/21\/aligning-incentives-at-gargantuan-banks\/","title":{"rendered":"Aligning incentives at gargantuan banks"},"content":{"rendered":"

News is swirling around on Wall Street about new incentive-based compensation rules being proposed for the nation’s largest banks.\u00a0 The specifics of the proposed rules are not that interesting.\u00a0 What is interesting is that the overarching strategy.\u00a0 Aligning incentives with desired behaviors.\u00a0 Genius!\u00a0 Radically regulators are talking about awarding stock and deferred compensation to executives instead of cash.<\/span><\/p>\n

My very first day of blog publishing, October 6, 2008 (see \u00a0https:\/\/jasonapollovoss.com\/web2008\/10\/06\/ethics-are-an-economic-issue\/<\/a>) I stated that executives at firms focused on too short a time horizon.\u00a0 The reason is that financial rewards were being given for one year’s performance.\u00a0 Never mind the fact that choices made to have a “great year” might ultimately bankrupt the company.\u00a0 Unfortunately, once that cash was awarded, it couldn’t be asked for back from the folks who had made, ultimately, very, very bad choices.\u00a0 To correct that myopic mentality I suggested changing how folks were compensated so that there was a more long-term focus.<\/span><\/p>\n

Deferred compensation awards pay for performance this year, but the ultimate reward is not handed out until certain criteria are met in the future.\u00a0 That clearly helps to align folks who are motivated in such a manner to the longer term interest of a business and its shareholders.\u00a0 By awarding stock that is also locked up for several years, the same thing is accomplished.\u00a0 That’s because stocks tend to rise for businesses that are performing well.\u00a0 So again, important decision makers at such businesses are incentivized to think of the consequences of their choices beyond one year.\u00a0 Excellent!<\/span><\/p>\n

Regulators are talking about extending these compensation rules to only cover the largest, most gargantuan banks.\u00a0 In the European Union the discussion is about much more stringent rules even than are being discussed in the United States.\u00a0 I expect there to be a lot of peripheral whining about these rules.\u00a0 Some banks, such as HSBC of the United Kingdom, are already threatening to move their headquarters to places where the rules are less stringent.\u00a0 Why?\u00a0 They are claiming that they are losing executives who want more money.<\/span><\/p>\n

This is an issue that I have also addressed on the blog and my response to the above concerns on the part of affected banks is: good riddance.\u00a0 If a company loses an employee who refuses to be compensated based on the long-term performance of the company, how can that be a bad thing?\u00a0 Can these complaining businesses honestly say that they prefer to have myopic employees?\u00a0 Such is the culture of big financial institutions that when the beer is taken away from the frat boys the party has seemingly ended.<\/span><\/p>\n

Clearly I am an advocate of the newly proposed rules.<\/span><\/p>\n

Jason<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

News is swirling around on Wall Street about new incentive-based compensation rules being proposed for the nation’s largest banks.\u00a0 The specifics of the proposed rules are not that interesting.\u00a0 What is interesting is that the overarching strategy.\u00a0 Aligning incentives with desired behaviors.\u00a0 Genius!\u00a0 Radically regulators are talking about awarding stock and deferred compensation to executives […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[3],"tags":[],"class_list":["post-2726","post","type-post","status-publish","format-standard","hentry","category-the-blog"],"_links":{"self":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/2726","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/comments?post=2726"}],"version-history":[{"count":0,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/2726\/revisions"}],"wp:attachment":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media?parent=2726"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/categories?post=2726"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/tags?post=2726"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}