Is "Pay for Performance" Destined to Become Obsolete in the Financial Sector?
Posted: Wednesday, May 20, 2009
by Becky Regan
Regan HR, Inc.
How would you like to have your compensation package determined by the Federal Government, even though your private sector employer did not receive any bailout government funds? According to the WSJ's "U.S. Eyes Bank Pay Overhaul," that's precisely the direction the government is headed in to expand governance and gain more control over the financial sector.
This move is the latest in a sequence of overt actions by the government demonstrating anti-capitalist and free-market sentiments. As the bailout began, it made sense that the Fed's regulators would directly influence and control pay packages for those executives who acted with greed, forfeited their fiduciary responsibilities, and sabotaged their company's very viability. OK for GM and AIG too, since they were under the same bailout scenario.
But this is different. Mr. Geitner has instructed his staff to begin discussions with the Fed, FDIC, the SEC and others about implementing controls addressing compensation practices. They are seeking control over lower level jobs in financial institutions and looking to expand their base of control beyond currently unregulated institutions, such as hedge funds, private-equity firms and foreign banks.
Recently I was puzzled to read that Mr. Geitner would not accept repayment of Federal funds from banks who decided they didn't want the government intervention that accompanied the receipt of bailout funds. The banks were financially able to pay back those borrowed funds. I wondered, why wouldn't the government want taxpayer dollars returned in order to reduce the amount of TARP subsidies (and the Federal deficit)?
The answer is that there's been a fundamental shift in government's role representing an expansion of power to nationalize the banking system in the United States. Capitalism and pay for performance is threatened to become a thing of the past within the financial sector. Government's move to socialization and a new effort to level the playing field is the new conventional wisdom. Individual achievement is being forfeited for the collective good. Corporate titans are now held with the same level of respect as used car salesmen; the politicians are the new elite.
I'm a believer in the old model that pays for performance. I don't want to be lumped in with everyone into a system where there is no reward or recognition for individual excellence. I believe that people who work hard and get results should receive commensurate (and an appropriate level of) benefits.
As a HR Pro who worked extensively in the financial services sector, both for a mortgage bank and then for a large community bank, I witnessed first hand the forced push from bank examiners to promote the Community Reinvestment Act. The banks' rating from the Feds included this component for ongoing annual evaluations. We were directed to make loans to individuals who could not financially qualify for loans on their own, which eventually resulted in the credit and housing markets crisis. This was the beginning cause of the downward economic environment we now face.
Big banks are not like little banks. There are some big banks and little banks who have done everything "right." They made loans based upon conservative lending principles to maintain a clean credit portfolio. Now it appears not to matter whether you've managed credit well, or borrowed Federal funds. FDIC fees for banks are escalating dramatically, as much as tenfold or more for small community banks. Everyone is paying for the mistakes of others; the pain will flow out to affect us all through higher taxes and fees. Yet the government now wants to exert greater influence to dictate and control pay rates for non-executive level jobs.
Government intervention does not have a history of positive outcomes. Supply and demand have proven the test of time for free markets and our capitalist nation. Our government has demonstrated difficulty in managing its current responsibilities now let alone taking on control of huge bankrupt institutions/corporations including Freddy Mac, GM and Chrysler. Increased regulation after Enron's demise resulting in the Sarbanes Oxley legislation did not prevent us from realizing current economic woes. I do not have confidence that these latest actions will lead us to a better way of retaining and rewarding talent.
What do you think the impact of expanded government control and intervention will be to compensation professionals? And to the job market as the economy recovers and inflation returns?
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Becky is passionate about designing Human Resources programs and compensation plans that build organizations. Her approach? Support individual HR professionals with consulting and continuing education, delivered online at => http://www.ReganHR.com , via information products through the teleseminar format, plus coaching and mentorship programs. She can be reached at Becky@ReganHR.com.
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