Some European banks are reforming their pay incentives, but US banks refuse to budge

FOUR years after the collapse of Lehman Brothers and the almost total paralysis of capitalism’s central nervous system – the moment fear overwhelmed greed on Wall Street – we are starting to see a few glimmers of hope.

The good news: several big banks have finally started taking steps to reform Wall Street’s out-of-control compensation system, which rewards bankers and traders with big bonuses for taking insane risks with other people’s money.

The bad news: these banks are in Europe, and most of their US cousins still just don’t get it.

In recent days, both Deutsche Bank and UBS announced plans to change their compensation systems. Deutsche Bank said that the portion of the pay its top 150 managing directors receive in the form of deferred stock would vest after five years, instead of three, which should concentrate their minds for a bit longer.

The bank also appointed an outside committee to examine its pay practices generally, and pledged to be at the forefront of change in the industry. While not yet the sort of extensive transformation that will protect the rest of us from bankers’ bad behaviour, the Deutsche Bank proposals at least prove the old saw that in the land of the blind, the one-eyed man remains king.

UBS, for its part, said it was considering capping banker and trader bonuses and making them a function of the executives’ fixed salaries or of the bank’s profitability. UBS also said it was examining a five-year vesting option for stock awards, along the line of Deutsche Bank’s proposal. Credit Suisse Group and HSBC Holdings have also taken baby steps in the direction of compensation reform.

In the US, there has been virtual silence on the topic. Bankers and traders on Wall Street still get rewarded with big bonuses solely based upon the revenue they generate from the products they sell. Just as before the financial crisis and unlike almost every other business on Earth, about 50 percent of every dollar of revenue generated on Wall Street goes right back out the door in the form of compensation.

Not surprisingly, this absurd compensation system encourages bankers and traders to keep selling and trading, giving very little thought to the consequences on the rest of us for the products they sell or the big trading bets they make. As for accountability, forget it.

Worse, neither Lloyd Blankfein, the chief executive of Goldman Sachs, nor Jamie Dimon, his counterpart at JPMorgan Chase – Wall Street’s highest profile leaders – have said anything about changing this flawed system, while continuing to be paid tens of millions in annual compensation. Instead, Goldman Sachs cut corners by eliminating its two-year analyst programme for college seniors. This is not leadership.

To his credit, James Gorman, the chief executive of Morgan Stanley, has at least addressed the flawed Wall Street compensation system: in 2011, Morgan Stanley’s bankers and traders had their cash bonuses capped at $125 000 (R1 million). Gorman said publicly, at the World Economic Forum in January, that if they did not like it, they could just leave. Few have, and why would they? Where else but Wall Street can they get paid so much for risking none of their own money?

And just as the basic compensation structure on Wall Street remains for the most part unchanged, so too does its behaviour, despite the Dodd-Frank law and the ceaseless writing and rewriting of the new regulations it mandated.