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Practice Management > Compensation and Fees

Compensation Capers, Part II

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In my May 4 column, I wrote about the problems that often occur when adverse parties tinker with compensation plans. This is particularly true when government is the adverse party, for the dynamics of profit-making do not always fit into their thinking. In the article I expressed the hope that current moves in this area by government did not become a trend.

Well, that was, to say the least, a false hope. According to the lead article on the front page of the May 13 Wall Street Journal, it is obvious the Obama administration will seek ways to expand its control over compensation plans. In case you missed it, I would like to quote from the WSJ article.

“The Obama Administration has begun serious talks about how it can change compensation practices across the financial services industry, including at companies that did not receive federal bail-out money, according to people familiar with the matter.

“The initiative, which is in its early stages, is part of an ambitious and likely controversial effort to broadly address the way financial companies pay employees and executives, including an attempt to more closely align pay with long term performance.

“Administration and regulatory officials are looking at various options, including using the Federal Reserve’s supervisory powers, the power of the Securities and Exchange Commission and moral suasion. Officials are also looking at what could be done legislatively.

“At the same time, House Financial Services Committee Chairman Barney Frank, D.-Mass., is working on legislation that could strengthen the government’s ability both to monitor compensation and to curb incentives that threaten a company’s viability or pose a systemic threat to the economy.

“It is unclear how such a bill would fit with what the Fed and others are already considering. But any legislation passed would make it harder for policy makers to dial back limits once the crisis subsides.”

Or, to put it bluntly, once such legislation passes, we are stuck with it even if it is not needed or wanted. The camel’s nose is already under the tent; it is just a matter of time before the animal fills the tent. Congress has played a heavy role in the financial crisis, first by tearing down the walls between banks and certain aspects of commerce and also by putting pressure on lenders to open up to sub-prime borrowers.

It is hard to feel confident that these same people are better at running banks and other financial organizations than the current leadership. There may be a few bad apples out there, but by and large, I believe a free market system can, through competitive compensation practices, make better selections of its leaders.

As I did in my original piece, I want to reiterate that in writing on this subject, I make no judgment insofar as excess compensation that has been the subject of news reports. My reason for this is that I don’t have the facts and I am well aware of how the media likes to gin up outrage where there is any suspicion of misdeed. My only concern here is the evolution of what looks a lot like potential wage and price controls that failed in years past.

With the foregoing initiatives starting to surface, I can’t help but wonder how this is affecting those who are advocating an optional federal charter for life insurance companies. It is obvious that the current administration is looking for more handles with which to manipulate companies engaged in financial services. These initiatives, plus the tax proposals being floated, should certainly dispel any notion that the federal government, at any level, is the industry’s good buddy. Overcoming a few administrative hurdles like licensing and policy filing is a high price to pay for bringing the camel into our own tent.

My previous column raised the concern that companies whose compensation plans were restrained by government may lose talented people to companies not so restricted. Press reports indicate that this is indeed happening. But now a new problem is starting to come to light which may have long-term detrimental effects on financial services companies. It seems that in order to meet so-called stress tests and other pressures, valuable employees are being terminated as a temporary expedient.

Most all employees make a contribution to the mission of a company, but there are always a few that “make things happen.” They are called key persons or profit centers and most often determine the success of a company. These people are also usually at the top end of the pay scale and deservedly so. News of several such people being terminated has been reported, but one in particular has come to my attention, largely because I have known her all her life.

The person I refer to is an attorney who has spent over 22 years administering trust estates for a major national bank. About two years ago she was honored as the employee of the year out of a workforce of more than 100,000. Her work has been outstanding and she was an asset to the bank’s trust department. Because of her value, she was among the higher paid (if not the highest) people in her department. Without any warning or reason, she was terminated, leaving the work to be done by lesser paid and less experienced persons. Looking long term, this is a high price to pay for cost cutting.

Much that has transpired this year and proposed for the future has been in the spirit of change. Change is important, but subject to the caveat offered by this German proverb, “to change is not the same as to improve.”


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