Wednesday, June 24, 2009

New Citi Plan could reduce risk

Citicorp announced plans to increase salaries today. The plan raised the ire of TARP oversight chairwoman Elizabeth Warren.
Yet Warren, who testified to House Financial Services today in defense of the administration’s proposed Consumer Financial Protection Agency, is misdirecting her anger.

As CNN reported today, the Citi plan is not to make its employees richer. Instead the plan swaps bonuses for salary. While it may be strange to most, almost two thirds of compensation for financial industry workers is not in their salary but rather in bonuses. Remember the “golden parachutes?” None of that money was salary.

So the plan is about redirecting the type of payment. Bonuses have been blamed for making traders more likely to take excessive risk and focus on short-term profit. Shifting to salary should reduce those incentives. The plan makes financial analyists more like other workers, and they think less about how their actions contribute to the profit margin in next quarter's report. While theory suggests that employers care most about total compensation, the Citi move indicates that the type of compensation really does impact incentives and should be considered in business decisions.

No comments: