After the deluge comes the yacht party. A new year, a new bonus season for investment banks"”with payouts a lot bigger than last year's and in some cases probably approaching the records hauls of the boom years. The United Kingdom has passed new rules requiring banks to hold back most bonuses for three years to keep bankers from walking out the door rich just before the whole edifice collapses. American banks are trying to find ways to make their payouts more politically palatable and, as the Wall Street Journal reports, shifting some of the cash bonanza into "restricted shares""”stock that can't be sold for several years.
You may imagine that, after the furor of the last year, all this means that investment bankers will be paid substantially less. It doesn't. It might take more time for them to get their money, but the likelihood is that the new pay rules will ultimately mean bankers get paid more.
The irony of efforts to rein in or to rationalize out-of-control pay scales is that in general they have ultimately made the problem worse, not better. It's for this reason that Nell Minow, an expert on corporate governance and one of the most ardent advocates of shareholder rights, told The New Yorker that she opposes most regulatory efforts at pay reform. Maybe the simplest and most classic example of this is 1993 legislation that created big tax disadvantages for salaries over the $1 million mark. The net result was that corporations shifted more compensation into (often only nominally) performance-based plans"”the very bonuses that are now at issue in bankers' pay.
The more elaborately corporations and government have tried to restructure pay packages, the higher the numbers have risen. One key inflection point was the shift from cash to stock options, pushed in part by an influential paper by business professors Michael Jensen and Kevin Murphy that urged companies to use options to get executives to focus on their share price. Whether this actually made executives more attuned to shareholder interests is arguable; it certainly did make them wealthier.
Stock options fell out of favor after the technology boom at the beginning of the last decade, which handed tech-company employees and officers barrels of money that the smarter or more cynical ones squirreled away before the market collapsed. In the wake of that fiasco, many companies started replacing options"”which reward employees for outsize and often unsustained market upticks"”with restricted shares, which vest over several years. Compared with options, shares hold less risk (they're worth money even if the stock price stays the same, while options are worth nothing unless the share price rises) and less potential for extreme rewards. New accounting rules that made options less attractive for corporations solidified the trend and were supposed to end the options bonanza.
Look, though, at what actually happened. Take the case of Microsoft (MSFT). In 2003, Microsoft declared that it would stop the kinds of stock-option grants that made so many early employees into multimillionaires and replace the performance-based part of employees' pay packages with restricted shares. At the end of 2003, Microsoft's share price was $27 a share. That's where it has languished since then; it's now up all of $3 a share to about $30. Had Microsoft stuck with stock options, employees would have gained little. With restricted shares, they do much better.
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