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Why Greed Is Good Again

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Star bankers may commit sin of avarice -- but their critics are expert in the 6 other deadly sins.

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Greed is back already -- perhaps it never went away. On the back of revived earnings, compensation for star bankers is looking up.

Excessive executive remuneration is widely viewed as a symptom of this deadly sin.
For some, excessive pay contravenes ideas of equality. A banker should be paid the same as a nurse, who should be paid the same as a doctor.

This misunderstands the concept of equality. Anatole France observed: "The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread." It challenges concepts of motivating achievement through reward. Objective assessment of different contributions is also likely to prove difficult.

Concern about excessive pay also focuses on allocation; who gets what. Mark Twain once admitted: "I am opposed to millionaires, but it would be dangerous to offer me the position."

For others, the issue is proportionality; a chief executive's reward is disproportionate to his or her contribution.

Tight, inbred circles of directors and consultants determine senior executive salaries. (Much to the eternal chagrin of those firms that suddenly found themselves subject to intense public scrutiny -- from AIG (AIG), to JPMorgan (JPM), to Bank of America (BAC), to Citigroup (C).

Benchmarking exercises merely reinforce the norm, with packages being justified as "needing to buy the best talent" or "meeting the demands of a competitive market." Results are also easily manipulated to meet specified performance hurdles for bonuses. Recent severance payments highlight that failure is better rewarded than success.

John Kenneth Galbraith identified this pattern long ago: "The salary of the chief executive of the large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself."

But who's responsible? Many people are now shareholders, directly or through superannuation schemes. Critics ironically acquiesce to the award of generous senior executive packages. They either actively vote in favor of these contracts or fail to challenge the arrangements, as is their right.

There may be a double standard. Critics were willing to hand executives generous pay packets so those talented managers would make them richer. Many turned a blind eye to excesses when they became richer through higher share prices and dividends. George Orwell reminds us: "People sleep peaceably in their beds at night only because rough men stand ready to do violence on their behalf."
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No positions in stocks mentioned.

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