The Obama Administration is seeking to give investors a vote in how Wall Street titans compensate themselves. A party-line vote in the House of Representatives sent the Corporate And Financial Institution Compensation Fairness Act to the Senate, where it has yet to be voted on.
What Is It?
The "say on pay" bill, as it has come to be nicknamed, is part of a larger effort to shed some light on Wall Street's compensations practice after big banks took billions of dollars in taxpayer money to bail themselves out of the financial mess they created only to turnaround and award themselves obscene bonuses.
In the aftermath of the public outrage over big wigs flying around in private jets while begging for public money, nine big banks raked in $175 billion in bailout cash as a reward for losing investor's money, wrecking the financial system and jeopardizing the health of the economy. Those same banks then doled out $32.6 billion in bonuses to many of the very people responsible for the meltdown.
The Obama Administration responded with an initiative to give shareholders annual non-binding votes over the bonuses given to senior executives. A similar vote would apply to the golden parachute bonuses executives are paid when their firms are sold.
Although non-binding, the effort would put the numbers in the spotlight and give investors insight into how their money is being spent. It seems only fair. After all, the investors do own the companies and the executives are supposed to work on behalf of their owners. (Shareholders are getting a bigger say in how companies are run. Find out how you can be heard, read How Your Vote Can Change Corporate Policy.)
Government Intervention - Is It The Right Choice?
Republicans are crying foul, arguing that the government shouldn't be involved in setting wages or telling companies how to run their businesses.
For many taxpayers, it's a hollow argument. The executives have not only demonstrated their disregard for shareholders, they've also demonstrated their willingness to jeopardize the nation's economic health and lay off workers, all the while reaching deeply into taxpayers pockets to enrich themselves.
Another portion of the bill seeks to ban "unfair pay practices" for brokers and advisors, prohibiting compensative plans that reward lenders or traders for taking risks that threaten the financial system. This portion of the bill is déjà vu all over again, as the same type of thing was done in 2002 with Sarbanes-Oxley, which failed to make a difference.
Recall that the Sarbanes-Oxley Act of 2002, also known as the Public Company Accounting Reform and Investor Protection Act of 2002, was put in place after analysts at Wall Street firms gave rave reviews to bad stocks. Their ratings put lipstick on pigs, enabling brokers to sell shares of Tyco, Enron, WorldCom and other similar firms to unsuspecting investors. (Where there is money, there are swindlers. Protect yourself by learning how investors have been betrayed in the past. Check out The Biggest Stock Scams Of All Time.)
Less than ten years later, we have another Wall Street scandal and another new plan to curb criminal behavior, or at least make the criminals work a little harder. While the say on pay initiative is by no means a sure fire success, and like Sarbanes-Oxley future generations will likely debate its effectiveness, it looks to be a step in the right direction.
The Bottom Line
The financial services industry has done well by itself, creating loads of wealth for industry kingpins at the expense of mom and pop investors.
In bull markets and bear markets the one constant is that the guy who sold the investment gets paid. Sometimes he gets paid a little more to sell the products his firm created or was hired to promote. Sometimes he chooses products that pay better than others, even if the others would deliver better performance for his clients. Sometimes he just outright lies, cheats and steals to make a buck.
Given corporate America's propensity to victimize investors and the limited number of other venues investors have in which to put their kids through college and fund their retirements, it seems like the little guy needs all the help he can get.