Saturday, February 7, 2009

Paying wardens less to watch inmates doesn't make us any safer.

That's Jason Zweig's final analysis of Obama's pay cap for Wall St. "senior executives". The pay cap made great PR, but it probably won't do anything to address the problem it's supposed to stop: Wall St. firms rewarding themselves for failure.

What's worse, the pay cap may only help the firms come up with more creative ways to waste tax dollars given to them Uncle Sam. A key detail laying out how the law of unintended consequences will likely undermine the pay cap comes near the end of the article:
[T]he new rules from the Treasury Department permit Wall Street's "senior executives" to get incentive pay in the form of preferred stock that can't be cashed in until the taxpayers get their money back. But there s no rule yet against cashing all of it in at that point -- what compensation experts call cliff-vesting.

Thus, managers may be tempted to take greater risks in hopes of speeding up their preferred-stock payoff. If the risks go bad, Uncle Sam will eat the losses. "It's the classic trader's option," says George Wilbanks, a managing director at executive recruiter Russell Reynolds Associates: "Heads I win, tails you lose." He adds, "That's my biggest fear: that people are going to swing for the fences to get to the cliff-vest faster."

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