Perverse incentives are what we call benefits that arise from seemingly disapproved of and illogical behavior. The question is from who’s point of view are they perverse. The recipient sees them as morally neutral, he doesn’t care about his behavior as long as he is rewarded. For systems and institutions the effects are quite different.
As an example I blithely say that if your goal is to lose money I’ll gladly do that for your at a lower price (ironically it means I’ll have to work harder to make up for the amount I’m saving you in compensation).
But losing investor money is not the ostensible goal of a publicly traded company and practically every economist including especially the worst quacks and rattle shakers will spout rote sanctimonious manure about maximizing shareholder value when clearly that’s not the goal of the company management.
Why Wells Fargo’s Executives Will Keep Their Bonuses, Even After Fake Accounts Scandal
by David Dayen, The Intercept
Sep. 26 2016, 2:54 p.m.
Stumpf, under fire from senators demanding that the bank claw back executive bonuses as punishment for the scandal, insisted that any such decision would be made by a committee of the board of directors that handles compensation issues.
That board is made up of five current and former CEOs and executive chairpeople who have enjoyed giant salaries throughout their careers. Pulling the trigger on clawbacks would force them to turn on the system that made them rich. They’d also have to bite the hand that feeds them a steady supply of Wells Fargo stock.
This is a common situation, and it helps explain why executive compensation has inflated in recent decades. Corporate CEOs sit on one another’s boards and approve oversized pay packages, in the expectation that they will get the same treatment from their board in return. Some, like Stumpf, serve as both the CEO and board chairperson simultaneously.
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Top executives often receive stock instead of a base salary because of a Bill Clinton-era law exempting “performance-based” pay from a cap on corporate tax deductions for executive compensation.Under Wells Fargo’s self-imposed “clawback” policy, the Human Resources Committee can revoke executive stock awards in the event of misconduct, including anything that causes the company reputational harm or a failure in risk management. While companies rarely enforce these provisions, as former FDIC chair Sheila Bair told CNBC when the false account scandal broke, “If you’re going to use clawbacks, this would be the situation.”
At last week’s hearing, senators of both parties urged Wells Fargo to use the clawback provision, particularly for Carrie Tolstedt, the former head of community banking (chief overseer of retail account sales) who retired this year with career earnings of $125 million. Were Stumpf to retire, he would receive $123.6 million in his own right.
“To not invoke some degree of clawback for yourself and others involved would be committing malpractice from the standpoint of public relations,” said Sen. Bob Corker, R-Tenn., at the hearing. Stumpf replied that any decisions on clawbacks would result from “a board process.”
Time to Treat Bank CEOs Like Adults
By Dean Baker, Truthout
Monday, 26 September 2016 00:00
The country’s major banks are like trouble-making adolescents. They constantly get involved in some new and unimagined form of mischief. Back in the housing bubble years it was the pushing, packaging and selling of fraudulent mortgages. Just a few years later we had JP Morgan, the country’s largest bank, incurring billions in losses from the gambling debts of its “London Whale” subsidiary. And now we have the story of Wells Fargo, which fired 5,300 workers for selling phony accounts to the bank’s customers.
It is important to understand what is involved in this latest incident at Wells Fargo. The bank didn’t just discover last month that these employees had been ripping off its customers. These firings date back to 2011. The company has known for years that low-level employees were ripping off customers by assigning them accounts — and charging for them — which they did not ask for. And this was not an isolated incident, 5,300 workers is a lot of people even for a huge bank like Wells Fargo.
When so many workers break the rules, this suggests a problem with the system, not bad behavior by a rogue employee. And it is not hard to find the problem with the system. The bank gave these low level employees stringent quotas for account sales. In order to make these quotas, bank employees routinely made up phony accounts. This practice went on for five years.
As it became aware of widespread abuses, it’s hard to understand why the bank would not change its quota system for employees. One possibility is that they actually encouraged this behavior, since the new accounts (even phony accounts) would be seen as good news on Wall Street and drive up the bank’s stock price.
Certainly Wells Fargo CEO John Stumpf, as a major share and options holder, stood to gain from propping up the stock price, as pointed out by reporter David Dayen. In keeping with this explanation, Carrie Tolsted, the executive most immediately responsible for overseeing account sales, announced her resignation and took away $125 million in compensation. This is equal to the annual pay of roughly 5,000 starting bank tellers at Wells Fargo. That is not ordinarily the way employees are treated when they seriously mess up on the job.
Regardless of the exact motives, the real question is what will be the consequences for Stumpf and other top executives. Thus far, he has been forced to stand before a Senate committee and look contrite for four hours. Stumpf stands to make $19 million this year in compensation. That’s almost $5 million for each hour of contrition. Millions of trouble-making high school students must be very jealous.
There is little reason for most of us to worry about Stumpf contrition, or lack thereof. His bank broke the law repeatedly on a large scale. And, he was aware of these violations, yet he nonetheless left in place the incentive structure that caused them. In the adult world this should mean being held accountable.
This is not a question of being vindictive towards Stumpf, it’s a matter of getting the incentives right. If the only price for large-scale law breaking by the top executives of the big banks is a few hours of public shaming, but the rewards are tens of millions or even hundreds of millions in compensation, then we will continue to see bankers disregard the law, as they did at Wells Fargo and they did on a larger scale during the run-up of the housing bubble.
There is another aspect to the Wells Fargo scandal that is worth considering. Insofar as the bank was booking revenue on accounts that didn’t exist, it was also ripping off the banks’ shareholders. The shareholders’ interests are supposed to be protected by the bank’s board of directors.
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It’s hard not to wonder if the board ever asked questions about the large number of employees being fired for creating phony accounts. Did the board ever ask if they could get a CEO who was just as good for lower pay? For example, could they have paid Stumpf or his replacement half as much ($9.5 million a year) and gotten someone just as good, or would this person only have needed to fire 2,650 employees for ripping off the bank’s customers?
Great minds and so do ours.
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