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Five Things: Executive Talent? You Won't Find It Here


Compensation is usually set by directors and shareholders.These days, that's the government and taxpayers.


Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Bankable Talent? You Won't Find It Here

President Barack Obama Wednesday outlined a plan to limit executive pay at banks receiving rescue funds. Under the plan certain banks receiving what the President called "exceptional assistance," or very large sums of money, such as Citigroup (C), Bank of America (BAC) and American International Group (AIG) would be barred from paying top executives more than $500,000 a year. Further, any additional compensation granted to these executives would have to be in restricted stock that won't vest until taxpayers are repaid.

My, the government stepping in to restrict executive pay? I believe this is what people, namely, high paid banking executives, refer to as "a sticky wicket."

On the one hand, it's really the role of corporate directors and shareholders to set executive pay, not the government. But then, the government and taxpayers are quickly becoming the top shareholders in these failed banks.

There is also the tried-and-true Economics 101 concept of supply and demand. The reason price caps don't work is that it increases demand while removing incentives to produce, which creates shortages.

Applying that concept to banks, the argument could be made (and probably is being made even now by an op-ed writer in the Wall Street Journal) that the Obama plan to cap executive banker salaries will create a shortage of talent in the banking industry. Then again, while we can all pretty much agree on the law of supply and demand and basic economics, these banks have lost hundreds of billions of dollars. Just what kind of "executive talent" exactly is being lost?

2. What Next?

It is difficult to express what should be done to "fix" the banking system and the economy; difficult, because what should be done is, largely, nothing. But no one wants to hear that. It goes against the American way of "just fixing it." Unfortunately, this isn't an episode of MacGyver. It's real. And in the real world, sometimes things just can't be fixed.

The very last thing that should be done, however, is to force banks to lend during an economic slowdown when loan demand is declining since, by definition, this will mean flooding the system with more low quality debt... and that is precisely what brought us to where we are now.

3. The Future of Social Media? Exclusion.

Barely a day goes by without someone asking the question, How do we capitalize on the social networking phenomena and monetize this thing? If you like Facebook, Twitter and other assorted networks, you may not like this answer.

Unfortunately for those staking their fortune on social networking sites, this bear market will ultimately reveal most of them to be a fad similar to pet rocks and those Kanye West louvered sunglasses.

As social mood darkens, the fad of increasing openness and communication among large groups of acquaintances will disintegrate into more closed networks and fractured groups where what is key is trust, security and intimacy. Increasingly, we will see more people dropping out of social networks and an increase in the "coolness" of refusing to participate in the herding behavior surrounding these excessive sharing mechanisms.

One of the last vestiges of the bull market and peak positive social mood was heightened openness and the desire to share everything with everybody. That will give way very quickly to a far more closed attitude, an unwillingness to share with those who are not close intimates and a new embrace of mystery, secrecy and the perceived comfort of privacy.

This is not to say the technological structure of social networks is flawed. People have a tendency to view technology in what one might call an "application-literal" sense. In other words, there is a tendency to view Facebook, and the technology that makes it possible, as one and the same thing. However, these and other social networking sites are merely the skins adorning the technology.

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No positions in stocks mentioned.

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