Watch Out Wall Street, Here Come the Dutch!
September 13, 2009 - 6:59pm ET
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All the big banks in the Netherlands, pressed on by the Dutch finance minister, have agreed on a serious plan to restrain banker bonuses. And now the Dutch want the rest of the world to sign on.
Remember that fabled Dutch boy who stuck his finger in a dike and saved family and friends from a ravaging flood? That wonderful tale turns out to be a flight of fancy from a 19th century American novelist who never ever set foot in tulip land. But now a real-life Dutchman is trying to trump that mythic Dutch boy and save the world from a menacing new flood — of banker bonus cash.
Dutch finance minister Wouter Bos last week announced a deal that will limit Dutch banker bonuses to no more than one year’s salary. Next week he’ll be taking that deal to Pittsburgh, where the leaders of the world’s 20 most important economies will be debating possible curbs on the banker pay incentives that one year ago nearly deep-sixed the entire global economy.
The Dutch won’t be the only players in Pittsburgh seeking to rein in excessive financial industry pay. The French and the Germans are talking tough, too. But all these Europeans face a determined opposition — mainly from American and British officials, who seem content, even eager, to let banker pay settle back to business as usual.
And that could prove catastrophic. Bonus business as usual could trigger the same sort of banker recklessness that so devastated the world economy in 2008.
“It's obvious we're setting ourselves up for a repeat,” Sarah Anderson of the Washington, D.C.-based Institute for Policy Studies noted last week. “If people can still make loads of money on investments that blow up a year later, where is the disincentive for doing it all over again?”
The new Dutch bank pay deal aims to avert that repeat. Banks in the Netherlands, under pressure from finance minister Bos, have agreed to “implement a meticulous, restrained and long-term” approach to compensation that takes into account both bank financial self-interest and Dutch public opinion, or “society’s acceptance,” as the new Dutch banking code puts it.
The code will go into effect this January. After that date, executives at any bank based or doing business in the Netherlands will only be able to pocket “variable” pay that adds up to no more than an executive’s annual salary. This “variable” pay encompasses all executive pay incentives, not just bonuses but options and other stock awards as well.
The new Dutch pay standard, finance minister Bos enthused last week, “goes farther than anything that has happened so far in any other country.”
Indeed, the new Dutch code — if adopted internationally — would turn current financial industry pay practices upside-down. Salary currently only represents a tiny piece of bank executive take-home. Last year, for instance, Goldman Sachs CEO Lloyd Blankfein waltzed off with $42.95 million in total compensation. Only $600,000 of that came from salary.
The Dutch code — to discourage risky short-term profiteering — also postpones financial industry bonus payouts until three years after financial transactions have taken place and lets banks “claw back” any bonus outlays discovered to rest on phony short-term “performance.”
The new code, the Association of Dutch Banks crowed last Wednesday, fixes the Netherlands at the “forefront of international discussions” on restraining banker pay. That's certainly true. But the code does sport some troublesome weaknesses.
The code’s cap on pay incentives, for one, only applies to top bank executives, not to the traders who do the highly lucrative grunt work of wheeling and dealing.
And the code carries no penalties for noncompliance. Instead, the code takes a “comply or explain” stance. Firms that don’t comply must explain why they haven't in their official shareholder filings. The code's basic assumption: Dutch shareholders, once informed, will vote out of power managements that ignore the code’s strictures.
Other critics of the new Dutch initiative point to a more fundamental flaw: The code takes aim at the structure of financial industry pay, not the overall level of pay.
The current banker pay structure, Dutch finance minister Bos believes, creates a “perverse incentive to take excessive risks.” If banker pay revolved more around fixed salaries and less around bonuses, he contends, that incentive to engage in risky behavior would ease. For Bos, in effect, the “how” of executive pay now matters more than the “how much.”
But Bos himself, in the past, has recognized that the “how much” most definitely counts for plenty.
“I believe cohesion in society,” he told a British conference just last year, “is not served by inexplicable inequalities.”
Many Netherlanders want to see bolder action than a new banking code to level down those “inexplicable inequalities.” Some are calling for the adoption of what has come to be known as the “Balkenende standard,” the notion that no one paid with tax dollars should be making more than the about $265,000 that now goes to Dutch prime minister Jan Peter Balkenende.
Last month, the Dutch Labor Party gave the Balkenende standard a major boost. No one working in a publicly subsidized enterprise who makes over the standard, the party chair announced, will any longer be able to run as a Labor Party candidate for major office.
Meanwhile, outside the Netherlands, the world’s bankers can’t seem to agree how to respond to the global anger that the “Balkenende standard” reflects.
One banker camp, led by Goldman Sachs CEO Lloyd Blankfein, wants to play nice. Last week, at a financial industry conference in Germany, Blankfein called public outrage over banker pay “understandable and appropriate” and acknowledged that “misapplied” bonuses “can also encourage excess.”
Blankfein’s “solution”: have bankers take more of their pay in stock awards instead of cash bonuses, a subtle shift that simply switches the power-suit pockets that get stuffed.
Other bankers are acknowledging nothing. Bonuses “alone have not caused the financial crisis,” a Credit Suisse exec told last week's high-finance conference in Germany. Other financial dynamics “are substantially more important than the question of compensation,” pronounced the Deutsche Bank CEO.
“We're against absolute caps on compensation levels,” added a Morgan Stanley co-president.
Morgan Stanley need not worry. “Absolute caps” will get no blessing at next week’s G-20 summit in Pittsburgh — and neither, analysts predict, will anything close. The Dutch, apparently, simply don’t have enough fingers
Sam Pizzigati edits Too Much, the online weekly on excess and inequality.
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