Skip to main content

Dimon's $23 million payday isn't the problem

By Ingo Walter and Jennifer Carpenter, Special to CNN
updated 8:36 AM EDT, Fri May 18, 2012
A cutout figure of JPMorgan Chase CEO Jamie Dimon hovers above a May 2011 protest against banks on Wall Street.
A cutout figure of JPMorgan Chase CEO Jamie Dimon hovers above a May 2011 protest against banks on Wall Street.
STORY HIGHLIGHTS
  • JPMorgan CEO Jamie Dimon gets $23 million pay package despite the bank's $2 billion loss
  • Ingo Walter and Jennifer Carpenter: Real concern should not be level of executive pay
  • They say bank shareholders and employees have incentives to take risks to make more money
  • Focus on changing risk incentives rather than amount of pay, the writers say

Editor's note: Ingo Walter is the Seymour Milstein professor of finance, corporate governance and ethics, and Jennifer Carpenter is an associate professor of finance in the Stern School of Business at New York University.

(CNN) -- Here we go again. The perennial question of: "Would you rather own shares in a major financial conglomerate or manage one?" comes up as JPMorgan Chase loses more than $2 billion in trading bets.

The answer seems clear. If you're an executive who manages the money, you're likely to get a large paycheck and bonus even if you're responsible for the loss, directly or indirectly. Jamie Dimon is still getting his $23 million.

Shares of the major banks continue to trade well below book value and generate miserable performance metrics -- and have over the years been very poor investments -- while senior executives and key employees continue to walk away with vastly outsize earnings, even when they oversee massive losses.

Ingo Walter
Ingo Walter

Shareholders certainly have reasons to object to huge executive pay packages, especially ordinary people whose fund managers have put in stakes of the bank shares in their pension and mutual fund accounts.

Jennifer Carpenter
Jennifer Carpenter

But the level of executive compensation comes out of shareholders' pockets. If shareholders are unhappy with the division of the spoils, they have no one to blame but themselves. After all, they can always take their money elsewhere if they don't think their cut of bank profits is big enough.

The real concern for everyone -- including regulators and taxpayers -- is not the level of pay handed out to executives, nor how profits in a company are divided between employees and shareholders, but rather, the incentives for risk-taking that bank pay apparently continues to create.

Follow @CNNOpinion on Twitter and Facebook.com/cnnopinion.

Regulators have called for deferred compensation to address the incentive problem. If deferred compensation presents employees with serious exposure to potentially big losses, they'll have a major stake in the long-term solvency of the business and help spare taxpayers the cost of bailing out firms that have become too systemically important to fail.

FBI looking into bank's huge loss
Professor: Fair to question Volcker Rule
From AIG to JPMorgan, why London?
Carney: Well-run bank can make bad calls

But forcing employees to bear significant exposure to potentially big losses may come at a price. Employees may require higher salaries to compensate for increased risk. We're seeing this reflected in recently announced pay packages. The price is paid primarily by shareholders while the benefits of any improvement in financial stability accrue to society as a whole.

Deferred cash compensation makes employees debt holders, so it ought to reduce risk-taking. So should compensation in a form that explicitly converts to equity when the firm gets into trouble and is bailout-proof.

Deferred stock compensation, however, may do just the opposite. As long as there are implicit government guarantees for financial institutions that are considered too big, too complex or too interconnected to fail, the value of those institutions' stocks increases with risk-taking.

The more risk a bank takes, the greater the value of government guarantees and potential bailouts. This value gets passed on to the bank's stock price. If employees are paid in deferred stock, the risk incentives are then passed on to them, encouraging them to speculate.

Rules that mandate more pay in the form of stock miss the point. It helps align the interests of employees and shareholders, but it fails to align their interests with those of taxpayers.

Ultimately, it's the taxpayers who are held hostage. They care about the size of bailout necessitated by excessive risk-taking taken by banks, and about economic growth, but not about how bank profits are divided per se, since they don't get a cut in any case.

Regulators are aware that bank stockholders have an overriding desire to take more risk than is good for society because chronic under-pricing of government guarantees makes it profitable for banks to seek risky assets and lever them as much as possible. This is the reason for capital requirements and the Volcker Rule, which tries to restrict risk-taking.

Recent attempts to reform compensation overlook how complicated the compensation process can be. Trying to discourage risky behavior is like fighting an uphill battle against shareholders who like risk. Moreover, risk incentives are harder to measure, and their regulation is easy to circumvent.

Criticizing the compensation packages of JPMorgan's Dimon and his senior associates might be popular with voters, but regulators would be better off focusing on the source of the problem -- the mispricing of government guarantees that create perverse risk incentives in the first place.

Pricing deposit insurance differently or banning activities such as proprietary trading would give shareholders and employees alike an incentive to rein in risk-taking. Employee compensation would then reform itself.

The opinions expressed in this commentary are solely those of Ingo Walter and Jennifer Carpenter.

ADVERTISEMENT
Part of complete coverage on
updated 2:25 PM EST, Fri November 21, 2014
Maria Cardona says Republicans should appreciate President Obama's executive action on immigration.
updated 7:44 AM EST, Fri November 21, 2014
Van Jones says the Hunger Games is a more sweeping critique of wealth inequality than Elizabeth Warren's speech.
updated 6:29 PM EST, Thu November 20, 2014
obama immigration
David Gergen: It's deeply troubling to grant legal safe haven to unauthorized immigrants by executive order.
updated 8:34 PM EST, Thu November 20, 2014
Charles Kaiser recalls a four-hour lunch that offered insight into the famed director's genius.
updated 3:12 PM EST, Thu November 20, 2014
The plan by President Obama to provide legal status to millions of undocumented adults living in the U.S. leaves Republicans in a political quandary.
updated 10:13 PM EST, Thu November 20, 2014
Despite criticism from those on the right, Obama's expected immigration plans won't make much difference to deportation numbers, says Ruben Navarette.
updated 8:21 PM EST, Thu November 20, 2014
As new information and accusers against Bill Cosby are brought to light, we are reminded of an unshakable feature of American life: rape culture.
updated 5:56 PM EST, Thu November 20, 2014
When black people protest against police violence in Ferguson, Missouri, they're thought of as a "mob."
updated 3:11 PM EST, Wed November 19, 2014
Lost in much of the coverage of ISIS brutality is how successful the group has been at attracting other groups, says Peter Bergen.
updated 8:45 AM EST, Wed November 19, 2014
Do recent developments mean that full legalization of pot is inevitable? Not necessarily, but one would hope so, says Jeffrey Miron.
updated 8:19 AM EST, Wed November 19, 2014
We don't know what Bill Cosby did or did not do, but these allegations should not be easily dismissed, says Leslie Morgan Steiner.
updated 10:19 AM EST, Wed November 19, 2014
Does Palestinian leader Mahmoud Abbas have the influence to bring stability to Jerusalem?
updated 12:59 PM EST, Wed November 19, 2014
Even though there are far fewer people being stopped, does continued use of "broken windows" strategy mean minorities are still the target of undue police enforcement?
updated 9:58 PM EST, Mon November 17, 2014
The truth is, we ran away from the best progressive persuasion voice in our times because the ghost of our country's original sin still haunts us, writes Cornell Belcher.
updated 4:41 PM EST, Tue November 18, 2014
Children living in the Syrian city of Aleppo watch the sky. Not for signs of winter's approach, although the cold winds are already blowing, but for barrel bombs.
updated 8:21 AM EST, Mon November 17, 2014
We're stuck in a kind of Middle East Bermuda Triangle where messy outcomes are more likely than neat solutions, says Aaron David Miller.
updated 7:16 AM EST, Mon November 17, 2014
In the midst of the fight against Islamist rebels seeking to turn the clock back, a Kurdish region in Syria has approved a law ordering equality for women. Take that, ISIS!
updated 11:07 PM EST, Sun November 16, 2014
Ruben Navarrette says President Obama would be justified in acting on his own to limit deportations
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT