Would better bonuses make better bankers?

Barack Obama is catching some heat for saying that he doesn’t "begrudge" the bonuses paid to Goldman Sachs CEO Lloyd Blankfein and JPMorgan Chase chief Jamie Dimon ($9 and $17 million, respectively). I don’t see what the fuss is all about. It’s fairly simple: Good executives deserve to be well compensated for their work, while ...

Barack Obama is catching some heat for saying that he doesn't "begrudge" the bonuses paid to Goldman Sachs CEO Lloyd Blankfein and JPMorgan Chase chief Jamie Dimon ($9 and $17 million, respectively). I don't see what the fuss is all about. It's fairly simple: Good executives deserve to be well compensated for their work, while bad ones -- like Stanley O'Neal, who scored himself a $160 million golden parachute even as his firm, Merrill Lynch, was putting up huge losses -- do not. Obama might consider clarifying his remarks by borrowing from some old speeches of his: "I'm not against all bonus. Just dumb ones."

The key to encouraging good banker behavior is putting in place a compensation system that doesn't reward CEOs for taking dangerous risks to the financial system as a whole. Tying executive pay to long-term performance, not short-term stock boosts, would be a good start. Requiring so-called clawback provisions that put CEOs on the hook for losses, and not just gains, would be another wise move. And it would greatly help matters if CEOs of big financial firms were no longer able to stock their boards with cronies who let them do whatever they want.

To my mind, though, the most important reform would be to raise the amount of capital that banks are required to keep on their books. The reason "Wall Street CEOs gone wild" became such a huge problem, requiring massive government intervention, was that their institutions were too highly leveraged and couldn't cover their losses. If you get this reform right, many of the smaller problems -- including CEO pay -- become less dangerous to the economy as a whole.

Barack Obama is catching some heat for saying that he doesn’t "begrudge" the bonuses paid to Goldman Sachs CEO Lloyd Blankfein and JPMorgan Chase chief Jamie Dimon ($9 and $17 million, respectively). I don’t see what the fuss is all about. It’s fairly simple: Good executives deserve to be well compensated for their work, while bad ones — like Stanley O’Neal, who scored himself a $160 million golden parachute even as his firm, Merrill Lynch, was putting up huge losses — do not. Obama might consider clarifying his remarks by borrowing from some old speeches of his: "I’m not against all bonus. Just dumb ones."

The key to encouraging good banker behavior is putting in place a compensation system that doesn’t reward CEOs for taking dangerous risks to the financial system as a whole. Tying executive pay to long-term performance, not short-term stock boosts, would be a good start. Requiring so-called clawback provisions that put CEOs on the hook for losses, and not just gains, would be another wise move. And it would greatly help matters if CEOs of big financial firms were no longer able to stock their boards with cronies who let them do whatever they want.

To my mind, though, the most important reform would be to raise the amount of capital that banks are required to keep on their books. The reason "Wall Street CEOs gone wild" became such a huge problem, requiring massive government intervention, was that their institutions were too highly leveraged and couldn’t cover their losses. If you get this reform right, many of the smaller problems — including CEO pay — become less dangerous to the economy as a whole.

UPDATE: Wow, I see that the  blogosphere has now gone crazy reacting to the original Obama interview, and the White House is trying to walk it back. Even Paul Krugman is unloading on the prez. Twice. Krugman’s chief complaint is that Obama said, "like most of the American people, [I] don’t begrudge people success or wealth. That’s part of the free market system." Krugman: "but this wasn’t about free markets, this is an industry that survives only thanks to taxpayer backing." Fair enough, but I think what Obama meant is pretty clear: Blankfein and Dimon are the best of the lot, and they came out of this mess big winners.

See Also: Is It Time for the U.S. to Issue a Digital Dollar?

More from Foreign Policy

Oleg Salyukov salutes to soldiers during Russia’s Victory Day parade.
Oleg Salyukov salutes to soldiers during Russia’s Victory Day parade.

Stop Falling for Russia’s Delusions of Perpetual Victory

The best sources on the war are the Ukrainians on the ground.

A fire rages at the Central Research Institute of the Aerospace Defense Forces in Tver, Russia
A fire rages at the Central Research Institute of the Aerospace Defense Forces in Tver, Russia

Could Sabotage Stop Putin From Using the Nuclear Option?

If the West is behind mysterious fires in Russia, the ongoing—but deniable—threat could deter Putin from escalating.

China's Foreign Minister Wang Yi is received by his Kenyan counterpart, Raychelle Omamo, in Mombasa, Kenya.
China's Foreign Minister Wang Yi is received by his Kenyan counterpart, Raychelle Omamo, in Mombasa, Kenya.

While America Slept, China Became Indispensable

Washington has long ignored much of the world. Beijing hasn’t.

A bulldozer demolishes an illegal structure during a joint anti-encroachment drive conducted by North Delhi Municipal Corporation
A bulldozer demolishes an illegal structure during a joint anti-encroachment drive conducted by North Delhi Municipal Corporation

The World Ignored Russia’s Delusions. It Shouldn’t Make the Same Mistake With India.

Hindu nationalist ideologues in New Delhi are flirting with a dangerous revisionist history of South Asia.