May 26, 2011
Compensation for bankers and Wall St. CEOs should reflect their actual performance in relation to the well-being of the bank and its customers. Why is this important? Many famiies were affected by the economic collapse of 2008, and we don’t want that to happen again.
It is clear that Wall Street greed and pay practices were a major cause of the collapse. The more risks they took the higher their compensation. One way to change the incentives to prevent a recurrence is for regulators to use a safety index for incentive compensation, instead of a profit index. Any consideration of profits should be over the long-term.
Most big bankers now receive stock options. So if they can generate more profits, the stock price goes up, and their options become more valuable. Instead, they should use the bank’s bond price, which measures the overall ability of the bank to repay its own debt? Another measure of bank stability is the spread on credit default swaps. The closer a bank comes to failing, not paying bond debt, the bigger the spread on credit default swaps.
Safety, stability, and, in part, long-term profits should be the criteria for compensating those who run the big banks.
Thanks for your attention to this important matter.
Robert McNair
Boone, IA