Exec Pay Won’t Go Away

Executive pay is the issue that won’t go away.

Wall Street’s big bonuses, coming a year after the financial system nearly collapsed, have raised eyebrows all over Washington. Compensation was one of the issues raised at today’s opening session of the Financial Crisis Inquiry Commission, which was created by Congress to investigate the meltdown that forced the federal government to come to Wall Street’s rescue. Wall Street CEOs defended their compensation practices, saying they are tied to performance. And 2009, after all, was a much better year for Wall Street than 2008.

Financial-industry pay practices also led to a 3-2 vote yesterday by the Federal Deposit Insurance Commission’s board to propose a rule that would increase a bank’s deposit insurance premiums if the FDIC concludes the bank’s compensation structure encourages excessive risk taking.

Congress, of course, won’t leave this issue alone. Representative Dennis Kucinich, a liberal populist from Ohio, introduced legislation yesterday that would slap a 75 percent tax on all bonuses awarded to bankers, whether their institutions received Troubled Asset Relief Program money from the federal government or not. TARP recipients already are subject to compensation restrictions—one reason banks are paying back this money as quickly as they can.

Kucinich’s bill isn’t going anywhere—his main role in the House is to make other Democrats look more moderate. But the House’s most powerful Democrat on financial matters, Representative Barney Frank of Massachusetts, has decided to take another look at executive compensation.

“I think compensation has gotten excessive,” Frank said.

Frank announced today that the House Financial Services Committee, which he chairs, will hold a hearing January 22 on compensation practices in the financial-services industry.

Excessive compensation at financial firms is “a legitimate cause of concern for the country as a whole, and we’re going to address it,” Frank said.

The House already addressed the issue in its financial reform bill, which would give a public company’s shareholders a nonbinding vote on compensation for top executives, but Frank wants to look at whether that “say on pay” should be expanded.

He also wants to use the hearing to address the arguments that have been made against compensation curbs, such as the contention that this would drive top talent away from Wall Street.

“I don’t know where people would go for comparable salaries,” Frank said.

Other countries, including Great Britain, have imposed compensation restrictions at financial firms, he said. Wall Street’s best and brightest would have to make it as pro baseball players or movie stars in order to match the millions they’re making now, he added.

As for the argument that compensation curbs would lead to less trading activity on Wall Street, Frank said that’s “not a bad thing necessarily.”

A lot of Wall Street transactions don’t benefit the economy as a whole, but just generate profits for the traders. There is “overwhelming public justification,” Frank said, to restructure incentives that lead Wall Street firms to take excessive risk.

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Kent Hoover is the Washington bureau chief for bizjournals.