Citigroup CEO Vikram Pandit, advisor and director Robert Rubin and other senior executives are to forgo bonuses this year, FT reports. I can't see why this makes news. The group has announced huge losses and has been kept afloat by a $300 bn government bailout. The terms of the bailout require the US government to approve bonus packages.
But, perhaps I am being too naive. In the top banks and investment banks, the firm as a whole may be making losses but individuals can still get rewarded if their divisions have made profit of they, as individuals, have made profit. The culture is that you can't penalise high performers because others have stumbled badly; if you don't handout bonuses to performers, they will leave.
The FT report only mentions that some senior execs will forgo bonuses. It is not that there will be no bonuses at all. So, the 'culture' stays, even if there is some departure from it in these troubled times.
I was a little surprised to see mention of a 'clawback' clause in compensation schemes. But this refers to only to bonuses obtained through false information, not to bonuses being clawed back when people do badly in a given year after having done well in the previous years. As readers of this blog would know, the scheme I have urged is that just as there are bonuses against profit, there should be clawbacks or negative bonuses against losses. The adjustments of pluses and minuses should be made over the business cycle with the residual payout happening at the end of the cycle.
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Hello Professor,
However this would be a great idea but issue would be people ditching the companies at the first sign of trouble before the clawback kicks in.
Something similar to this was suggested by Raghuram Rajan, at that time IMF's chief economist. He was in favour of bonuses kept in an escrow account for some years and also losses made by firms attributed to responsible individuals and charged to their escrow accounts. But his suggestion was scoffed at, he was also branded a luddite. After all that was the time when Alan Greenspan was the presiding deity of everything financial and it was believed that good times would be followed only by better times.
Something similar to this was suggested by Raghuram Rajan, at that time IMF's chief economist. He was in favour of bonuses kept in an escrow account for some years and also losses made by firms attributed to responsible individuals and charged to their escrow accounts. But his suggestion was scoffed at, he was also branded a luddite. After all that was the time when Alan Greenspan was the presiding deity of everything financial and it was believed that good times would be followed only by better times.
Sorry, my above comment has been repeated. This was not for emphasis, but was entirely unintentional.
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