So Much For Performance-Based Pay On Wall Street

The hedge fund managers and Wall Streeters are screaming that teachers need to be held accountable through performance-based pay schemes that use student test scores as a basis for compensation.

They say this is only fair because everywhere else in the economy these days people are paid based upon performance, not some lockstep pay ladder.

The Wall Streeters and hedge fundies say this is especially so in business and on Wall Street where the only thing that matters is performance.

But of course, that's just self-serving jive:

Intent on fixing a banking system that contributed heavily to the recent financial crisis, lawmakers and regulators pushed Wall Street to overhaul its pay practices. Big banks responded by shifting more compensation into stock, a move intended to align employees’ interests more closely with those of investors and discourage excessive risk-taking.

But it turns out that executives have a way to get around those best-laid plans. Using complex investment transactions, they can limit the downside on their holdings, or even profit, as other shareholders are suffering.

More than a quarter of Goldman Sachs’s partners, a highly influential group of around 475 top executives, used these hedging strategies from July 2007 through November 2010, according to a New York Times analysis of regulatory filings. The arrangements were intended to protect their personal portfolios when the firm’s stock was highly volatile, especially at the height of the crisis.

In some cases, executives saved millions of dollars by using these tactics. One prominent Goldman investment banker avoided more than $7 million in losses over a four-month period.

Such transactions are at the center of a debate over whether Wall Street executives should be allowed to hedge their stock holdings. The concern with hedging is that executives can easily break the ties between compensation and company performance. Employees who hedge their holdings are less concerned about a falling share price. That’s why the government barred top executives at banks that received multiple bailouts from using the strategies until they paid back the funds.

“Many of these hedging activities can create situations when the executives’ interests run counter to the company,” said Patrick McGurn, a governance adviser at RiskMetrics, which advises investors. “I think a lot of people feel this doesn’t have a place in a compensation structure.”

More broadly, critics say, the practice of hedging represents another end run around financial reform.

Just business as usual from the criminals on Wall Street and at the hedge funds.

Do unto themselves what they would not do unto others.