October 23, 2009

Pulling the Weeds, Missing the Root

Today’s news cycle marks the first wave of reaction to the Treasury and Federal Reserve’s announcements on Wall Street compensation.  Inevitably, speculation has abounded as to the new policies’ long-term impact on Wall Street.

Critics howl that pay regulations will create a talent vacuum with top executives and traders heading for greener, i.e. less regulated, pastures.  Others rumble that regulations aren’t restrictive enough and simply allow firms to keep total compensation the same by changing the way it’s doled out.  Still others, while significantly less skeptical, believe that shareholders must take an active role in regulating compensation.  President Obama shares this view as well.

I agree that a change in Wall Street culture is needed, but executive compensation is just pulling at the weeds of the larger problem.  I think the main problem is the culture of short-termism – investing for short-term gains at the expense of long-term planning – that has taken root on Wall Street. We should align our efforts around combating this culture instead of setting arbitrary limits on compensation.

In my experience, the best way to enact long-term behavioral change is by incentivizing it.  That’s why I’ve joined the likes of Warren Buffett and John Bogle in signing the Aspen Institute’s Statement “Overcoming Short-Termism.”  In promoting these ideals, we can reach the desired end of a responsible financial and banking sector and can maintain that change across the long term.

I’m currently writing an article where I take a deeper dive on this very subject.  I‘ll be sure to post it here as I will be very interested to garner everyone’s feedback.