Thursday, January 14, 2010

Thought-Provoking Interview with Goldman Sachs Board Member Bill George



Harvard Management Practice professor Bill George is a smart guy, no question. But his recent interview with Big Think raises several questions about executive compensation that are intriguing and troubling. While George recognizes that there's an ethical and rational disconnect between executive pay and teacher pay, he unreasonably relates compensation in the banking world to the pay received by professional athletes and movie stars. At face value, the analogy doesn't seem unreasonable—paying top dollar for top talent is a fundamental part of a competitive capitalist system.

But consider this: 1) Neither Tom Brady nor Tom Hanks have the responsibility for the savings and fortunes of others that a broad percentage of those working in investment world inherently shoulder. They are responsible for their own careers and their own incomes and savings; and 2) When an actor or a sports star experiences financial ruin, the public is not expected to come to the rescue because someone was "too big to fail."

George also points out that without large bonuses (which are expected in the investment world), top talent might well leave large investment firms, choosing instead to work at private funds. That's an interesting notion, but it seems unreasonable to assume that there would even be that many positions at private funds willing or able to hire those managers and executives should they quit their jobs at JP Morgan or Goldman Sachs.

It's also interesting to note that one of the first things that George states (and later repeats) is his belief that long-term compensation should be tied to long-term performance. He also goes on to say that one of the major problems with Citi was that short-term compensation only incentivized fund managers on a quarterly basis. If someone performed well in the fourth quarter, they would receive a major bonus at the end of the year regardless of their performance for the other 75% of the year.

That said, I question George's interpretation of "long-term" performance. This seems to imply that "long-term" accounts only for the previous year. In virtually any other occupation I can think of, "long-term performance" would be measured in years, not months. There's a particular short-sightedness to this kind of temperature-taking that I find troubling. As we've seen over the course of the past two years, fortunes can change quickly, and one year in the black (2009) that was largely brought about by taxpayer support seems a tenuous foundation upon which to justify record or near-record compensation.

Instead of cutting those huge bonus checks, wouldn't major banks be better off if they created some sort of rainy day fund so that the next time they are near collapse they don't have to come running to the federal government? Just a thought.

All of this is not to vilify Bill George -- his other Big Think interviews are as intriguing and thought-provoking as this one. But if the big banking bonus culture needs to rely on public monies at a time when our national unemployment rate hovers at 10%, there's a problem. In essence, the TARP monies approved and dolled out under George W. Bush in October of 2008 and January of 2009 have fundamentally helped those at the top of the socio-economic ladder while leaving many of the rest of us behind.

President Obama announced today that over the course of the next decade, a new tax will seek to recoup the billions given to the country's largest financial institutions under the TARP funds. It's a good first step to holding those firms accountable for the mistakes they made and for the money they took from taxpayers in order to say afloat.

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