Lucian Bebchuk and Alma Cohen, professor of law, economics, and finance and visiting professor of law and economics at Harvard Law School, respectively, write that post-crisis executive compensation policies appear even more lucrative than prior to the meltdown for the Wall Street Journal:
New York State Attorney General Andrew Cuomo released yesterday a report on compensation and income at nine major banks during 2003-2009. An assessment of these figures raises serious concerns from the perspective of both investors and taxpayers.
The Cuomo report focuses on nine large financial institutions that received substantial TARP support from the government. Below we focus on the compensation decisions these firms made during the first half of 2009. Assuming that these decisions are a sign of things to come, the firms’ post-crisis pay policies appear to be, in the aggregate, even more lucrative to the firms’ employees than precrisis policies.
From shareholders’ perspective, it is useful to examine what may be labeled “Earnings before Compensation (“EBC”), which are equal to the sum of net income and compensation expenses. A financial firm’s ECB in any given year represents the total pie to be divided between the two groups crucial for the firm’s existence and operations — the firm’s employees and the shareholders providing the firm’s capital. Firms’ compensation decisions determine what fraction of ECB goes to employees rather than left in firms’ coffers (or distributed as dividends) to shareholders.
Click here to go to the op-ed piece in the Wall Street Journal.