Fallout: The Financial Crisis

Banks up to old tricks with salary raises

Bob Moon May 27, 2009
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Fallout: The Financial Crisis

Banks up to old tricks with salary raises

Bob Moon May 27, 2009
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TEXT OF STORY

Kai Ryssdal: From the Marketplace desk of the more things change, the more they stay the same. There were reports today that two more big banks are set to boost the pay for some employees. The Wall Street Journal says Citigroup and Bank of America will soon raise base salaries for their prized investment bankers. Morgan Stanley did something similar last week. Our senior business correspondent Bob Moon has more now on what this might mean for the Obama’s administration’s plan to overhaul Wall Street compensation.


BOB MOON: The big banks keep insisting they’re only taking the steps necessary to retain key employees, even in the face of the verbal lashing they took from President Obama just a few months ago.

PRESIDENT BARACK OBAMA: What gets people upset, and rightfully so, are executives being rewarded for failure.

The Obama administration plans to impose rules in near future aimed at realigning pay with performance at firms getting federal bailout money. But the banks are apparently trying to stay a step ahead.

John Coffee heads Columbia University’s Center on Corporate Governance. He says raising base salaries isn’t necessarily a bad thing, if it does, indeed, replace the bonuses that led to risky investments for only short-term gains.

JOHN COFFEE: That’s what triggered their bonus compensation. They lived under an “eat what you kill” incentive compensation formula. You were concerned only with getting that huge bonus in year one, and what happened to the company thereafter was someone else’s problem.

Coffee cautions, though, that there could be an ulterior motive. The banks may expect the Treasury Department’s new rules to limit bonuses to a certain percentage of the base compensation, so raising the base salary could also be a way to justify bigger bonuses too. But then, what are the chances the banks would try to do that?

COFFEE: Bank employees are very motivated to find a way to game the system, and probably have their hearts in it a little bit more than the Treasury Department, which may be worried primarily about the political fallout of seeming to authorize high bonuses.

Treasury Secretary Timothy Geithner has promised to unveil his new pay rules by mid-June. And he said over the weekend that “very, very substantial change” is needed in banking compensation practices.

I’m Bob Moon for Marketplace.

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