The public is outraged when organizations like AIG get approved for bailout funds and then take a vacation conference, which costs several hundred thousand dollars. This is exactly what is wrong with bailouts rewarding poor management. If you give them the money, there must be strings attached, and the saddest part of the bailout was that members of the government presented it to the public with a portion of the billions going toward executive compensation that should have enraged the public. The executives get to fail and get paid off millions in bonuses! I think a series of maximum prison terms for executives that engaged in fraud or negligence would do more to instill public confidence than helping financial institutions and also key to restoring confidence in the governments ability to make sound decisions would be devoting the billions of dollars to universal heath care, which would serve the public better than propping up failed organizations. No matter how bad the consequences of a large organization failing may be, nothing is more reassuring to the average Joe than free and affordable health care so that the public doesnt have to worry about the financial burden of becoming ill or the natural wear of aging.
In the November 18, 2008 Wall Street Journal, page C2, there is an article titled UBS Joins the Bonus Chop for Executives. Chairmen and twelve member management team give up bonuses, while others will get less: after accepting help from the Swiss government to recover from more than $46 billion in mortgage-related write-downs, UBS said that beginning next year, both cash and stock bonuses will be far more strongly tied to the banks performance and will be held in escrow, as opposed to being paid out immediately. (Opinion if bonuses were held in escrow for the auto company executives for two or more years it would have helped take away their ability to financially benefit while the company headed toward insolvency) Those who are rewarded will be those deliver good results over several years without assuming unnecessarily high risk, the bank said.
In addition to overhauling the pay program, UBS is looking into the legal grounds for clawing back bonuses made in the past years. Pressure is mounting on former executives such as Marcel Ospel, the banks longstanding chairman who was forced to step down, to follow Mr. Wufflis example to hand back bonuses. CEO Wuffli was asked to resign in 2007 following mortgage losses. The Swiss seem to be ahead of us on using common sense. The public should demand that those monies be treated like Nazi gold and returned to the company for its survival.
On page C2 of the same issue of the Wall Street Journal, the article For Wall Street, Less is more, discusses that it is a sensible act for top executives at Wall Street firms to follow the lead of Deutsche Bank and UBS and forgo bonuses and states that keeping the ratio of compensation to net revenues under fifty percent is vital, and adopting the UBS example to keep a portion of cash bonuses in escrow with a provision for some to be deducted if the bank generates losses in the future. Morgan Stanley failed last year. It raised it the overall compensation ratio to fifty-nine percent, after taking a big hot to net revenues from a bad mortgage-related trade. The article continues: Weak revenues will ensure lower bonuses anyway. But the firms should make a point by also paying out a lower-than-usual percentage of that shrunken revenue number in compensation. The executives at the auto companies should prove themselves worthy by sacrificing bonuses from the last several years and salary. Id want to see them all in at the financial poker table playing the best game they can to rebuild their companies, and if that means bankruptcy so be it. Rescuing the auto companies distracts from the real issue, bankruptcy can be utilized, and maybe we dont need three U.S. automakers, after all the Japanese have dominated electronics for over twenty years and we accepted that because they could make a better product, and if foreign makers can make a better car for less, you cant stop the market from voting with their dollars. All the government might be doing at the expense of the public is keeping another car manufacturer operating on the market as an option that consumers dont want, in the U.S. or abroad.
So while executive compensation is an important issue, it wasnt clamped down on, but now that the public has come to their senses and sees that there is more downward mobility than upward, and if the public gets squeezed financially shouldnt they demand that executives sacrifice their grossly inflated compensation for poor performance. In the May 17, 1997 issue of Forbes there is a section on executive compensation 800 chief executives paychecks: Median take $1.9 million, up 27%. Looking back, they reaped the rewards but their efforts didnt build stable empires. Compensation flourished due to stock options but if there had been ten-year options so that performance was calculated over a longer term at least there would be some form of justice. At least then they would have been limited to their salaries, and not walked away with multi-million dollar bonuses for short-term beneficial performance, and in hindsight that would have also cut back on the fraud by Enron, Worldcom, Tyco, Global Crossing and others, or at least voided their ability to benefit substantially from their malfeasance and cash out at the top.