Who Wants to be (Half) a Millionaire?

by Bryan Derman on February 17, 2009

in Banking Industry, Bryan Derman, Financial Regulators

Bryan Derman

Somehow the issue of how to compensate the management of America’s crippled banks has becoming a more compelling topic than the more fundamental question of how to (or whether to) rescue those banks.  

Michael Kinsley jumps into the middle of this debate in today’s Washington Post with an article titled “Banking for Dummies”, poignantly questioning why there is so much concern about limiting the pay of the only people among the seven billion on the planet who have already proven that they are incapable of responsibly steering these huge institutions.

We have our own opinions on the matter (of course), but wanted to take an opportunity here to solicit the input of our readership, particularly those of you in the investment community.  While the picture is clouded by the involvement of the government, it seems to me that what is happening in TARP is not terribly different from what occurs in many distressed asset investments.

The US taxpayer has jumped into a monster turnaround situation, providing DIP financing (in the form of bond guarantees) and emergency equity capital (in the form of preferred shares and warrants).  Certain private equity investors do this sort of thing all the time (look at Liberty Media’s daring rescue of Sirius XM), though unlike a private investor, the government has been hesitant to acquire voting shares and demand board seats.  Perhaps it’s the lack of such formal ownership that leads some to question the government’s right to have a say in executive compensation.

So, we would be keen to hear from investors with experience in these kinds of turnaround deals about how they design compensation packages.  When you come into these kinds of distressed situations:

  • Are past compensation policies generally maintained?
  • How do you compete for talent against healthier, publicly-owned competitors while addressing the need to conserve cash?
  • Is there a valid and motivational role for restricted stock or similar instruments?

We’d love to hear from you.

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