Suggestion For Bank CEO Bonuses

In recent weeks, the news has discussed at length the $16.0 billion that bank CEOs received last year and how institutions, which received “bailout” funds, are not accounting for their use.

How a CEO navigates through tough times is more indicative of their capabilities than good times. By extension, we could say that in tough times a CEO’s skills are of even greater value (perhaps 5 or more times) to the survival of a financial entity. However, where we differ, in respect to bonus schemes, is the asset class they should receive.

Currently, foreclosures and write-offs are expected to remain extremely elevated. If CEOs had a real stake in reworking these “bad” loans (non-cash or stock bonuses), perhaps their financial entities would actually be able to stem the tide of foreclosures. If half the potential losses could be reworked, the chances for the number of foreclosures would decrease with time.

The result — a reduction to the loss the borrower must digest (and the elimination of the hit to their credit score), a reduction to the loss of principal for the lending institution, the retention of shareholder’s equity, and ultimately the price of the shares.

If the Board of Director would take this approach, with respect to CEOs and upper management bonus schemes, it would go a long way in enhancing the public’s view of these institutions.

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