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February 06, 2013 at 08:53 AM
Sallie Krawcheck didn’t pull any punches when she was president of Bank of America-Merrill Lynch’s wealth management unit, and now she’s using her bully pulpit as a LinkedIn blogger to explain why paying bankers in stock is a lousy idea.
In 2013, banks must change the way they compensate their senior executives, Krawcheck (left) argues in her Tuesday blog post, saying that company boards are making a mistake by moving to more equity ownership for senior execs since the 2008 crash. She certainly has an insider’s view of the business: Krawcheck is a veteran not only of BofA, but of Citi Smith Barney and Sanford C. Bernstein & Co.
“Coming out of the crisis, the national discussion focused on ‘pay them less’ and very little on ‘pay them better,’” writes Krawcheck, who was summarily fired in September 2011 when BOFA Chief Executive Brian Moynihan went public with plans to reorganize the bank’s management and operating units. “Instead, the long-term conventional wisdom that senior executives should be aligned with equity holders remained unexamined: the amount they are paid is often based on stockholder metrics (like ROE), and the form of payment is in increasing proportions of stock.”
Krawcheck, who majored in journalism at the University of North Carolina at Chapel Hill before going on to earn her MBA from Columbia Business School, says it’s time for large banks’ boards to come up with new payment strategies for executives, such as bonds, “which are fundamentally risk-discouraging.”
Claiming that she herself and the rest of the banking world now know that their business is unlike any other, Krawcheck then goes on to list her top 10 reasons paying bank executives in more stock is “a bad idea.” (See No. 10 on the list, where Krawcheck name-checks her former firm.)
1. Equities encourage risk. While a stock’s downside is capped at $0, its upside isn’t, Krawcheck says. “Therefore, the right play over time is to take on more risk, to try to capture that asynchronous upside.”
2. Equities encourage risk, part 2. “Did you ever buy a stock because you hoped to get back just your principal? No. You bought it because you wanted it to go up,” Krawcheck says, adding that company management assumes bigger risks to grow earnings and returns.
3. Equity holders have short-term horizons. “I can’t tell you how many times I’ve been in meetings with equity investors in which they encouraged/pushed the bank management team to grow earnings more quickly,” she writes. “No, not always hedge fund managers; also conventional mutual fund managers looking to reap the benefits of short-term performance for their own hugely important quarterly performance reporting periods.”
