COLUMN: Incentive Pay for Execs Is Overrated

By Kahr, Andrew | American Banker, June 8, 2011 | Go to article overview
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COLUMN: Incentive Pay for Execs Is Overrated

Kahr, Andrew, American Banker

Byline: Andrew Kahr

Have you tuned out the shrill, interminable debate about incentives for executives in banks, from CEOs down? It's an ill-informed and increasingly misdirected and distracting hubbub.

We are told short-term incentives promoted foolish risk-taking, causing financial crisis. Ridiculous. Angelo Mozilo's drive to achieve a 30% market share in mortgage originations wasn't fueled by desire for immediate financial rewards. He was the longest of long-term investors, starting in 1984 or earlier. Likewise, Joe Cassano at AIG "earned" $280 million over a period of eight years by selling what proved to be disastrous credit-default swaps. He didn't have his head turned by one year's bonus calculation. The same was true for Wamu: Kerry Killinger is reported to have received $88 million from 2001 through 2007. So, let's skip the simplistic claptrap.

A green beacon shines from On High: Charlie Munger (Warren Buffett's partner) asserts repeatedly that incentives have a huge influence on employee accomplishment. So, we are doomed to go on yammering about three- to five-year plans, clawbacks and their endless variations.

I bow to the authority of Charlie's age and particularly his wealth. But my view is different. Excepting only lone-wolf salesmen, I haven't seen incentives improve anyone's decisions and accomplishments within a large organization. Monetary incentives never made me work harder, or smarter.

Charlie's favorite example is itself antique. He says workers at FedEx performed better when sent home after finishing the day's parcels (whether few or many). Should we try that on bank employees working item processing volume? These people aren't unionized either. But overtime has to be paid under state wage and hour laws. And we actually have more work for these employees, beyond the day's volume of debits and credits.

Paying fixed compensation for fixed hours of work was neither obvious nor an inspiration. At the beginning of the Industrial Revolution in England, people who had previously done piecework at home were hired into textile mills and allowed to come and go as they pleased, to meet output quotas. Chaos ensued.

The notion of working and getting paid for an eight-hour day came later. And circling back to doing white-collar work at home, even empowered by the most modern technology, has nearly always failed - despite the savings in occupancy and commuting cost. We need fixed hours and fixed pay at the workplace. Without that, we lose both work discipline and financial discipline.

I know managers who started handing out $20 and $50 gift cards at the end of a productive day.

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COLUMN: Incentive Pay for Execs Is Overrated


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