No quick pay fix for Wall Street - 18 Feb 2009

Overwhelming discontent with Wall Street pay practices by both the American public and lawmakers is forcing many firms to rethink how they reward employees and executives.

TARP is 'partial success'

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NEW
YORK (CNNMoney.com) -- Few would argue that the lavish paydays enjoyed
by Wall Street executives in recent years need to end.

With the
financial industry in such turmoil, it's difficult to justify huge
salaries, bonuses and other perks. But are politicians taking the best
approach to end the culture of excess?

A key measure of the
massive stimulus package signed into law Tuesday afternoon by President
Obama would effectively rein in outsized bonuses for senior executives
and top earners at firms that got money under the Troubled Asset Relief
Program, or TARP.

Still, compensation experts said there are a
lot of questions about this provision, including what kind of bonus
payments would be restricted as well as how to identify which employees
reported the biggest haul for the year.

"There are a lot of
details that need to be filled in about how this would operate," said
Tim Bartl, senior vice president and general counsel at the Washington,
D.C.-based Center on Executive Compensation.

One potential
unintended consequence of the plan, notes Bartl, is that the pay
restrictions could steadily work their way down the employee ranks.

Under
the amendment, last year's top performers at financial institutions
that accepted TARP funds would feel the squeeze in 2009.

But
with their compensation capped this year, the measure could arguably
impact the next tier of highest-paid workers in following years.

While
the financial industry takes a beating in court of public opinion, some
Wall Street firms are attempting to come up with some new ideas about
compensation as well.

Leaders at both Goldman Sachs (GS, Fortune 500) and Morgan Stanley (MS, Fortune 500)
- two companies that have become synonymous with multi-million dollar
pay packages - told Congress last week they planned to do a better job
of tying an employee's compensation to the success of the firm by
making a larger portion of annual bonuses in the form of equity.

Another
proposal that has gained momentum recently is so-called "clawback"
provisions which would reclaim pay from workers whose actions may
damage the firm's long-term financial health.

But even those remedies may be fraught with problems, according to some experts.

Alan
Johnson of compensation consultancy firm Johnson Associates said
clawback provisions are good in theory but difficult to put into
practice.

A trader who made a bad bet on a stock and subsequently
left the firm could be required to return money many years after
leaving. In such a scenario, it may be tough to prove that one
individual was responsible for the loss, resulting in lawsuits,
arbitration and plenty of other legal headaches.

"At some big
firm, in a year in which you have thousands of people lose you money,
you would really have a witch hunt going on," said Johnson.

One performance-based plan unveiled late last year by the Swiss banking giant UBS (UBS) is showing signs of promise as a model for the rest of Wall Street to follow.

In
the UBS plan, senior executives, lower-level management and other
so-called "risk takers" would receive a fixed salary as well as
variable compensation in the form of both cash and equity. The variable
portion would be held in reserve and paid out or reduced accordingly
depending on how the firm performs in the future.

Bartl said a
similar plan adopted by Bank of America earlier this year suggests this
type of approach could work. "It shows the direction things are heading
- back to this more balanced view," he said.

In
recent years, some compensation experts have endorsed the idea of
greater equity stakes and higher salaries for workers, instead of
relying so heavily on incentive pay programs like the annual bonus.

While common throughout corporate America, bonuses are widely viewed as a cornerstone of Wall Street's compensation structure...

more..http://money.cnn.com/2009/02/17/news/companies/wall_street_pay/index.htm