John Thain, the former chief executive of Merrill Lynch, who appears to be running a low-key campaign for the rehabilitation of his reputation, has an interesting suggestion for how to reform bankers’ pay.
Mr Thain made it during a long presentation to MBA students at the Wharton School last month, which can be seen and read here.
Mr Thain correctly pointed out during the session that the old partnership structure of Wall Street firms, under which partners’ capital was at risk until they retired, produced better incentives in terms of risk management than bonuses based on short-term performance.
However (in the Part Two transcript) he says that it could be replicated by public companies:
“You could set up that structure. You could basically say okay, CEOs of big financial institutions take 100 per cent of their compensation in stock. The stock vests over 10 years. And you can’t sell any of it until after you retire. And then you sell it out over five years after you retire. A structure like that actually mirrors to a fair extent the partnership structure.”
This is not a bad idea but it might be extended. Why not truly replicate the partnership structure by applying those conditions to everyone who reached “partner” level – senior managing director or the equivalent at a large investment bank?
That really would tied investment bankers’ wealth up in their institutions and give them an incentive to rein in excessive risk-taking and trading in opaque instruments.
Apart from this, as has been noted elsewhere, his best soundbite was his apology for decorating his office at Merrill lavishly. That became a point of contention in his tussle with Ken Lewis, BoA’s chief executive, who has now resigned.
“We reconfigured the office so that it was like a normal office where you could have guests and have meetings. And we decorated it in kind of the style that Merrill Lynch offices, which were very, very nice. Now, in hindsight that was a mistake. All right? I admit that was a mistake. I didn’t know the world was going to explode, but it did. And that was a mistake and I’m sorry that I did that. If I had that to do over again, I’d furnish it in Ikea.”
