Buttonwood: CEO bonuses as a function of ROE; yeah right!

20020910-033 NewYork financial wall street.JPG I am now ready to actually do a post on the weekly Buttonwood column from The Economist. This week Buttonwood takes us to Wall Street and the world of whopping bonuses to financial executives and tycoons. The discourse is well known but it is still important as ever.

If a company has a good year and churns out a good results  for its shareholders it is only reasonable that the top of the company is rewarded accordingly. However, in the corporate landscape of USA this is not the common rule, not even close. The bonuses lavished this year are no exception.

"As 2005 ended, it did not appear to be a particularly good year in America’s financial markets. Returns on equities were modest, returns on debt (broadly measured) almost negligible. (...) in the fourth quarter of last year compensation costs at Goldman Sachs rose by 52%, compared with 2004, at Morgan Stanley by 45% and at Lehman Brothers by 28%, according to an analyst at Merrill Lynch."

This is not a particularly new thing and many commentators and observers have pointed to this mismatch before, not least The Economist. In my studies I have also investigated this and below are some nice references to the issue of growing ceo pay.

"For Richer" - Paul Krugman. "The explosion in C.E.O. pay over the past 30 years is an amazing story in its own right, and an important one. But it is only the most spectacular indicator of a broader story, the reconcentration of income and wealth in the U.S. The rich have always been different from you and me, but they are far more different now than they were not long ago."

Capitalism and democracy - Economist survey (subscription needed). "The really damaging perception now is that many of these mega-incomes have been gained through the abuse of power—and that, in some cases, they are also being preserved by the use of that moneyed power in politics. Worse still, the perception is largely correct."

You should also go see the cross-referrals to other Economist articles on CEOs and their paycheck from this week's Buttonwood.  

Apart from the discourse of how CEO incomes are hurting society Buttonwood points to another interesting trend in compensational payments. It consequently seems that although the bonuses are bigger than ever, the actual spending is becoming  increasingly more hidden and out of the spotlight.

"An executive arriving to work today at a top investment bank in a Rolls Royce, Bentley or Ferrari would risk being fired (these ought to be kept at second homes). (...) People are, of course, spending their bonuses, but often in ways that are hard to see."

And secondly, the difference between winners and losers amongst executives and tycoons is becoming increasingly more volatile.

"As anyone with a shred of perspective has come to learn, this year’s lavishly rewarded star might be part of next year’s purge."

This might a whole lot to the ones actually getting the bonuses but to the rest of us, it means very little. The money still goes to the top in an ever bigger stream and as a structural mechanism this is something of a credibility problem of the corporate financial sector.