George Will has a radical suggestion for taming Wall Street’s focus on short-term results. In a recent Washington Post op-ed piece, What the Fed’s Job Isn’t, he proposed that “Congress could pass a law saying: No company benefiting from a substantial federal subvention (which would now include Morgan) may pay any executive more than the highest pay of a federal civil servant ($124,010).”
Will has a point. Wall Street (and by that, I mean the leadership on Wall Street) needs to be incentivized to act in a socially responsible way. It is far too focused on achieving short-term results at the expense of long-term growth and stability. When things go wrong, institutions that are “too big to fail” know the Government will rescue them. Absent a proper incentive to do otherwise, Wall Street will keep on dancing (to paraphrase ex-Citigroup CEO Chuck Prince ill-advised sound bite) leaving the rest of us (taxpayers, employees and shareholders) to pay the cover charge, the bar tab and the limo ride home.
You’re correct that Wall Street generally is overpaid considering IBs pay out roughly 50% of revenues in IC. But I think you need to focus more on the solution (perhaps tying IC to ROE or horrors eliminate the excessive layers of managers that generate 0 while paying revenue generators their cut and sticking to the math of 10% of 0 is 0) rather than tossing out the red herring of collateral damage. Significant blame lies with shareholders themselves for not tossing the board out and in turn management. It’s not the business of regulators to determine compensation schemes for the private sector.