Regulators at the SEC and politicians on Capitol Hill seem to have short memories when it comes to executive compensation. When the SEC years ago decided to make the compensation of top executives public information, it had the all too predictable result of actually increasing average compensation levels. Once a top CEO knew what other CEOs were making, he could argue for a pay hike based upon being “underpaid”. Of course regulators were “shocked” by the resulting “race to the top.” 

Similarly Congress was shocked when after deciding to heavily tax salaries over $1 million, that companies shifted away from direct cash pay and toward options and increased bonuses in the form of shares. 

And soon Washington will also pretend to be shocked and outraged that the current anger over Wall Street bonuses is leading firms to reduce bonuses, but increase base pay. As illustrated in today’s Wall Street Journal, companies like Morgan Stanley have increased their base pay from $300,000 to $400,000. Even Citibank, essentially a ward of the US government, is increasing its base pay to $300,000 for employees that were previously eligible for bonuses.

The real harm in this is not that Wall Street employees are getting paid more in cash, but that less of their compensation will be tied to their performance, and the performance of their firm. A flat salary, regardless of how hard you work, will encourage shirking. Perhaps even worse, is that more upfront cash, and less long-term stock options, will shift Wall Street’s focus even more toward today, rather than tomorrow. So much for Washington fixing the short term focus of Wall Street, but then one shouldn’t be too surprised given the even more short term focus of Washington.