US curbs on bankers' pay

The US will cap bankers' base pay at $500,000. Big deal. They will still continue to receive variable pay in the form of stock options. Moreover, the cap applies only to about 25 firms that have received extraordinary emergency assistance. It also does not apply to people down the line. This is just tokenism. I guess it's necessary tokenism given public fury over tax payer money being lavished on failed banks. Besides, if you are under part government ownership, you must accept government pay scales.

Base pay has always been a relatively small component of pay payckages on Wall Street. The real moolah is in variable cash and stock option payouts. My quarrel has never been with the absolute size of these payouts. It has always been about the design of compensation schemes.

Performance in a bank can never been accurately measured at a point in time. What is performance can be known only over the entire business cycle. It follows that variable pay should never be handed out in full at the end of the year. Only a portion of the variable cash component can be paid out- the rest goes into an account. If there is a loss in the next year, there will be a negative entry in the CEO's account. And so on for a period of seven or ten years, which is the length of the typical business cycle. At the end of the period, variable cash pay will be handed out. Similarly, stock options can vest only over a very long period- say, 10 years.

Remember, Lehman and others recorded their historical best peformances in the years preceding their downfall. Making bonus payments in all those years was absurd because that so-called performance also contained the seeds of future downfall.

The salary cap apart, there is much drama being enacted in the US over executive use of corporate jets for travel. For the forthcoming Congressional hearings, top bank execs are going to extraordinary lengths to avoid courting controversy. FT reports:

Weary travellers trying to negotiate New York’s La Guardia airport on Tuesday night or Wednesday morning should not be surprised to bump into Goldman Sachs' Blankfein or Morgan Stanely's John Mack.

Vikram Pandit, Citigroup’s chief executive will also be on one of the NYC-DC air shuttles. After being castigated by the US Treasury for wanting to take delivery of a $50m jet – a decision subsequently reversed – Citi is in no mood to antagonise its government benefactors.

As for Jamie Dimon, people close to the JP Morgan Chasechief did not disclose his means of transport other than to say it will be public.

The banks’ spin doctors argue that commercial travel is often the preferred choice for New York-based executives because of the frequency of flights between the Big Apple and the nation’s capital.

But even John Stumpf, who runs San Francisco-based Wells Fargo , is going to have to stand in line at security before he embarks on his coast-to-coast jaunt.

Ken Lewis, the Bank of America chief who is trying to sell three corporate jets and an helicopter acquired with the takeover of Merrill Lynch, will cover the 400 miles between Charlotte, North Carolina, and Washington by train.