Pay czar tips his hand

The Federal Reserve is working toward proposing broad rules for compensation at financial firms. European Union leaders are doing the same. But, the most specific proposal on banker pay may have come from the new treasury "czar" who has been asked to create a plan backed by the U.S. government. He may have tipped his hand during a speech on September 17.

In an exclusive report for BNET, pay "czar" Kenneth Feinberg said he favored compensating bankers with stock and not cash. While his suggestion applies to firms that have received bail-out money, it may be part of a road-map for the entire industry. BNET writes, "Under Feinberg's plan, managers may get restricted stock they are barred from selling for three to five years. They also could receive stock that may not be sold until the company meets certain benchmarks, such as repayment of TARP obligations, or the IPO or sale of a specific business unit."

Such a program would depart from many other proposed schemes aimed at reducing Wall Street pay. Feinberg is not calling for a cap on compensation as much as he is talking about tying riches to specific goals, most of which are long-term. If his plan is put into place, bankers will be less likely to move from firm to firm looking for better salary packages. Bankers will also have to look well beyond the performance of the next quarter, as short-term earnings will become less important to financial executives, which could be a double-edged sword.

The one advantage of short-term compensation on Wall Street is that it has tended to encourage banks and investment houses to push earnings up year after year, often by taking higher risks. If these earning enhancements did not ruin their companies, as they did in the credit meltdown, shareholders benefited from the steady climb in profits.

Feinberg's proposal may end up being the standard the the government accepts, but it may not be the best one for stockholders in big financial institutions. "Long-term" has its limitations.

Douglas A. McIntyre is an editor at 24/7 Wall St.

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