Risk Management

12:42 PM
Melanie Rodier
Melanie Rodier
Commentary
Connect Directly
Facebook
Google+
LinkedIn
Twitter
RSS
E-Mail
50%
50%

The Executive Compensation Revolution Shows Some Timid Results

JP Morgan chief executive Jamie Dimon, who has been in the news for all the wrong reasons in the last few months, could (and should) take a personal hit, given his bank’s $7 billion trading snafu. But in Wall Street board rooms, all is not as it seems.

The quiet ‘executive compensation’ revolution which recently came to be known as the ‘Shareholders’ Spring’ is starting to show some timid results.

JP Morgan and Citigroup are two of the latest banks that are now re-thinking their top executives’ pay practices, according to an article in the Wall Street Journal.

JP Morgan chief executive Jamie Dimon, who has been in the news for all the wrong reasons in the last few months, could (and should) take a personal hit, given his bank’s $7 billion trading snafu.

After all, the bank’s boss should ultimately be held responsible for his employees’ errors, particularly if they are as protracted as the London Whale’s massive bets and lax risk management practices, right?

Well, not so fast. According to the Journal, JP Morgan’s directors are “considering” lower 2012 bonuses for Dimon and other top executives at the bank. Rather disappointingly, they also are grappling with the question of how to do that without drastically reducing the executives' take-home pay,” the paper quoted sources as saying.

Of course, it is not just the multibillion dollar trading mistake that is causing JP Morgan to take another look at executive pay. Weaker financial industry performance, sluggish economic growth and broad cost-cutting are also affecting revenue.

Recently, Deutsche Bank’s co-CEO Anshu Jain said the bank was looking to change its ethics policy and compensation practices to meet the stricter expectations of regulators, government and the public. He noted that the bank would "make sure that the tone at the top is crystal clear."

This year, UBS also reduced its bonus pool for 2011 by 40 percent to $2.8 billion, due to sliding profits. The total bonus handed out to its investment bankers was 60 percent lower than for 2010, according to reports.

Meanwhile, earlier this year, in what has been named the ‘Shareholders’ Spring’, 37% of shareholder votes at UBS were cast against the Swiss bank’s pay proposals, while 54% voted against life insurer Aviva’s compensation policies.

In April, Citigroup shareholders rejected a board-approved compensation package for chief executive Vikram S. Pandit which boosted his pay to $14.9 million from $1 the previous year. Some 55 percent of votes went against the package.

While shareholders would like to see the bonuses of Wall Street executives be more commensurate with banks’ results, a high-profile trading disaster like the one that befell JP Morgan is even more reason to reduce bonuses in the eyes of most investors.

However, JP Morgan doesn’t want to rock the boat too much. The Times notes that some inside the bank “don't want to be seen as overreacting to what the company views as a one-time event.”

From the WSJ:

Some executives argued that a series of management changes made in late July should have been delayed so that the moves wouldn't be perceived as a reaction to the trading losses, said people close to the bank. But Mr. Dimon said the announcement should be made as planned, these people added.

Ultimately, if a $7 billion trading mistake isn’t enough to humble a chief executive into taking a pay cut, it is hard to see how executive compensation practices will change in the near future. At the very least, it looks like it will take a wider sweeping ‘Shareholder Spring’ - or more swiveling of the regulatory hammer.

Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio
Comment  | 
Print  | 
More Insights
More Commentary
Shore Up Cyber Security Now
Knowing that a data breach can and will happen at some point, asset management firms can manage new operational and regulatory risk with a layered approach to cyber security.
Is Big Data a Problem or an Opportunity?
When it comes to data, financial services firms are, as a rule, quite circumspect. They fear cyberattacks, data theft, data loss, security breaches, data privacy, and human error.
Data Integrity: A Necessity, Not an Option
Financial institutions that have taken on the data integrity task in the past now have to spend more money on hardware, software, and people just to keep up with the demand.
What Colombia’s New IT Campaign Means for Latin American Tech Investment
Colombia’s campaign is the latest example of how Latin America is trying to edge into the global technology space.
Initial Margin: When Does More Turn Out to Be Less?
Changing margin regulations are set to affect the OTC derivative market, including initial margin risk models for non-cleared OTCs.
Register for Wall Street & Technology Newsletters
White Papers
Current Issue
Wall Street & Technology - July 2014
In addition to regular audits, the SEC will start to scrutinize the cyber-security preparedness of market participants.
Video
Inside Abel Noser's Trading Floor
Inside Abel Noser's Trading Floor
Advanced Trading takes you on an exclusive tour of Abel Noser's New York trading floor, where the agency broker known for transaction cost analysis, is customizing algorithms for the buy side, while growing its fixed income trading and transitions business.