Friday, March 20, 2009

Bonus Onus

The equity market has yet to reach that point of capitulation that typically signals a market bottom and the resumption of upward price momentum. This could be due in part to the massive amounts of federal monies that have gone into the financial system. The bailout and stimulus money’s are working something like one of those rescue trampolines fire fighters use to catch people jumping from burning buildings. The building is still on fire but the fall onto rubber was not as abrupt as it might have been onto concrete.

Perhaps to realize capitulation in the equity markets, we must first achieve it in the various bubbles that have developed in our economy. In the March 17th post, “Say on Pay,” we suggested that compensation should be added to the list of economic “bubbles."

If the AIG situation is exemplary of private sector compensation practices one might conclude capitalism has gone amuck. There has been this extraordinary outcry for retribution from calls for suicide to levying 100% taxes on the bonuses paid to employees of companies like AIG that received so-called bailout or stimulus money. The collective indignation is understandable given that we observe at AIG bonus commitments to people who may have failed to do a good job and may even no longer work for AIG.

There is enough precedent for breaking contractual commitments to pension funds to suggest that these particular contracts could have been renegotiated by new management when taking over a year ago. Rather Mr. Liddy chose to let the money go out AIG's door, apparently with the view that it was acceptable to let tax payers foot the bill - people who themselves might be out of work and facing bankruptcy, foreclosure or eviction.

Clearly compensation practices have encouraged greed over prudence and inspired currupt instead of ethical behavior. Employees are rewarded for the mere act of taking risk rather than returns earned on risk. At the of the long chain of accountability stand shareholders. It is the shareholder who must do a better job in policing the actions of management in prudently using corporate resources for compensation, whether they are rescued by tax payer money or not.

As unpleasant as the hue and cry has become, this might be the cathartic necessary to break and clean up the corporate compensation bubble. The onus for performance must be on those who receive a bonus! Once we have that thread running through the private sector again, we may see some improvement in the equity markets.

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