I’m not at all convinced that any CEO is ever worth a $10 million pay package, but if it wasn’t clear when that deal was signed, it became obvious very quickly that Robert Benmosche was something of a prima donna. That’s far from unusual in people earning 8-figure salaries: indeed, being the recipient of such a massive emolument tends to exacerbate such tendencies in anybody.

The real culprit in this story, however, isn’t Benmosche, who has been something of a known quantity from day one at AIG. Rather, it’s the people at Treasury, who are now zero for two in picking AIG CEOs. Maybe it’s not as easy as they thought.

The problem is that the CEO of AIG isn’t like the CEO of a public company: he’s fundamentally a civil servant, and is much more constrained in his actions, including his ability to hire people at high salaries, than 99% of other CEOs. The leader of AIG is always going to be second-guessed and micromanaged, which will make any CEO type unhappy.

It’s become clear that the Obama administration is incapable of hiring a largely-independent CEO for AIG and then leaving him to his own devices. So if and when Benmosche leaves, they should probably reconsider the whole job, and how much it’s really worth to them. My guess is that the answer is going to be much less than $10 million.

Michelle Leder finds one of the weirdest executive perks yet in the employment contract for Vonage CEO Mark Lefar:

The Company shall also promptly pay, or reimburse the Executive for, the costs of his private air travel from and to the Company’s principal offices in Holmdel, New Jersey (subject to the submission of reasonable documentation) in (a) an annual amount up to a maximum of $250,000 in 2008 and $600,000 in 2009 and subsequent calendar years while employed during the Term, plus (b) an amount equal to the cost of commercial air travel for each trip (i.e., the cost of a first-class, fully refundable, direct flight booked one week prior to travel) while employed during the Term.

Stripped of the legalese, this seems to mean that Vonage is paying for Lefar to commute by private jet between New Jersey and his home in Atlanta — and then, on top of that, is giving him cash equal to the price that he would have paid for a commercial air ticket, had he flown commercial. As Michelle says:

What kind of sense does that make? Has Lefar figured out a way to be in a Gulfstream and a Delta 737 at the same time?

Maybe Lefar needs his personal assistant to be with him in both Atlanta and Holmdel, but refuses to let the assistant onto the private jet? It’s all extremely peculiar.

Oh wow. This is much more aggressive than anybody had dared hope it would be:

The seven companies that received the most assistance will have to cut the cash payouts to their 25 best-paid executives by an average of about 90 percent from last year…

And for all executives the total compensation, which includes bonuses, will drop, on average, by about 50 percent…

At the financial products division of A.I.G., the locus of problems that plagued the large insurer and forced its rescue with more than $180 billion in taxpayer assistance, no top executive will receive more than $200,000 in total compensation, a stunning decline from previous years in which the unit produced many wealthy executives and traders.

In contrast to previous years, an official said, executives in the financial products division will receive no other compensation, like stocks or stock options.

Are you feeling outraged? Well, remember that $200,000 a year makes you rich. (Yes, really.) But these guys are effectively civil servants now, and they deserve to be paid as such. And if they have any fiscal responsibility at all, they will have saved up a huge amount of their past compensation to tide them through this fallow period.

What this means is that the people who used to be the 25 best-paid employees are now going to be far down the list, with underlings making much more than they do. That’s OK too. There’s no particular reason why senior executives should always be the best-paid employees in any organization. Quite the opposite, in fact.

I love the fact that Kenneth Feinberg has made his largely symbolic cut to Ken Lewis’s 2009 payout:

At U.S. pay czar Kenneth Feinberg’s request, Lewis will not receive the $1.5 million salary he was slated to make this year, company spokesman Bob Stickler on Thursday. Lewis will not receive a bonus or any other payments for 2009…

A breakdown of Lewis’s outgoing compensation shows that he is expecting about $53 million of pension benefits from an account frozen years ago and another $72 million of accrued and deferred stock compensation.

Obviously, money is fungible, and Lewis’s $1.5 million in salary was just going to be the cherry on top of the other $125 million he’s managing to walk home with upon departing BofA. Since Feinberg had no real jurisdiction over the big lump sum due Lewis, he just decided to bring the sum he could control down to zero.

Lewis clearly isn’t running BofA well — in the current interest-rate environment, it’s actually really quite difficult for a bank to have racked up a billion-dollar loss last quarter, even after $2.2 billion in Merrill Lynch profits. Any pay that Lewis gets is not going to be for performance.

On the other hand, BofA’s loss, coming as it does on the heels of similar results at Citigroup, shows that times remain very tough in the real world west of the Hudson River. And that’s something the stock-market bulls, and the Goldman Sachs plutocrats, would do well to remember.

Andrew Ross Sorkin today picks up the Law of the Excluded Middle and runs with it, in a column headlined “Don’t Fail, or Reward Success”:

We can’t have it both ways, either. At one moment, many in the nation crossed their fingers hoping Goldman and the rest of Wall Street would be saved to halt the country’s downward spiral. But when the banks finally get up on their feet, we want them to fall flat again. Mr. Blankfein can’t win.

It’s true that we didn’t want Goldman Sachs to fail. But that’s got nothing to do with some kind of national wish for Lloyd Blankfein’s continued success, and everything to do with the fact that Goldman Sachs is too big to fail. Had the natural order of capitalism been allowed to work its course, then AIG and Morgan Stanley and Goldman Sachs and Citigroup and Bank of America and the rest of the financial system would have essentially imploded. Needless to say, that would not have been good for the economy as a whole. But just because we need these banks to exist does not mean that we want these banks to make enormous profits.

Sorkin does, eventually, arrive at the nub of the argument:

The bad news is the absolute number. It is far greater than any other bonus figure on Wall Street. Goldman says that its compensation program is based on pay for performance, and it is hard to argue that it has not performed well.

The company also says that it needs to pay these large sums to retain its best people or risk losing them to rivals. That may be true for a small percentage of its most senior executives, but some experts suggest it is a disingenuous argument…

Indeed, it is possible that Goldman’s bonus largess is creating a vicious circle: other, perhaps lesser firms, are probably going to pay even higher bonuses to try to compete with Goldman.

And therein lies the rub: While Goldman may have the Midas touch, the rest of Wall Street never seems to be able to keep up. And the only way for rival firms to compete with Goldman is take to outsize risk.

Believe it or not, there’s a simple (if not easy) solution to this problem: Goldman should just pay its employees less money, and have more left over for shareholders. That’s not asking Goldman to “fall flat”, it’s just asking that it not contribute in a harmful way to the culture of risk-taking that pervades Wall Street.

How should Goldman do this? One way would be by putting a cap on bonuses. Most people, in most jobs, don’t get any bonus at all. When there is a bonus, it’s generally small: maybe a thousand dollars here, 5% there — enough to buy some nice Christmas presents, perhaps, but not enough to buy a small Latin American nation.

It’s entirely conceivable that if Goldman started paying its bankers less money, the firm as a whole might become less profitable. From a public-policy point of view, that’s fine: the nation has no particular interest in Goldman making spectacular amounts of money every quarter. From a philosophical point of view, there’s a bit of a problem with artificial restraints on trade, but that’s something which goes hand in hand with too-big-to-fail status. If you’re a small investment-banking boutique, feel free to pay your people as much as you like. But if you have a trillion-dollar balance sheet and pose a major systemic risk to the economy, then you lose that freedom.

So the answer to the question Sorkin poses in the question is, essentially, “yes”: we don’t want Goldman to fail, and neither do we want Goldman to reward success in the way it has of late. What we do want is less excess and less systemic risk. Allowing a super-sized Goldman to pay out untold billions in bonuses every year — even if they’re cleverly structured in the form of slowly-vesting stock — achieves neither of those aims.

It’s been obvious that Citi had to sell Phibro since April, so the first reaction to today’s news is “what took you so long”.

Interestingly, we now, finally, get to see some numbers on just how profitable Phibro has been:

From 1997 until the second quarter of 2009, Phibro averaged approximately $200 million per year in pre-tax earnings, while over the last five years Phibro’s earnings averaged $371 million per year. Phibro has been profitable each fiscal year since 1997, attaining profitability in 80 percent of all quarters.

If Andrew Hall was really in line for a $100 million bonus this year, that’s an enormous chunk of Phibro’s medium-term profitability. Paying Hall on the basis of average annual earnings over the past five years makes a certain amount of sense, but paying him 27% of average annual earnings over the past five years is more than a little excessive.

In any case, you can see why Citi says, in its own news release , that the numbers here “are not material to Citigroup’s earnings”: by the time Citi offsets Phibro’s annual profits (after payouts to Hall) with the amount that Oxy is paying for the company, the most important result here is that Citi has managed to lose its highest-paid employee (who owns a castle). That’s going to be very helpful when it comes to pay negotiations with Kenneth Feinberg.

Millions of Americans know that Bank of America doesn’t care about numbers in the hundreds or thousands of dollars. It seems the government is in a similar situation:

A Bank of America spokesman disputed both the SEIU’s figures - noting the bank received only $45 billion in public assistance.

Yeah, a mere $45 billion. When the numbers are so microscopic, why should anybody pay attention to $126 million (more or less: after all, these values are all of negligible consequence) which is due to be trousered by Ken Lewis upon his departure?

As for me, I like the idea of Kenneth Feinberg cracking down on Lewis’s payout. BofA isn’t paying for performance, and it’s not like the bank needs has any worries about Lewis disappearing off to a higher-paying rival. The bank’s hilarious attempts to downplay the scale of BofA’s bailout — and of Lewis’s package — only prove how easy this decision really is.

TED has some great insights on banker pay, including this one:

Deferred pay lost its effectiveness as a distributed risk management tool. As investment banks grew ever larger and more complex, each banker had less and less impact on the overall results and health of his bank, almost no matter how much he made.

This is the problem of restaurant checks. If there’s only one or two people dining, it’s relatively easy to keep the cost per person down. Even when the group rises to four or six, when everybody knows that everybody else is paying attention to what they’re ordering, things can remain within the realm of reason. But get a huge group of people together, all ordering individually, and things get out of control. Bringing down the cost of your own consumption has no visible effect on the amount that you’ll be asked to pay at the end, and so everybody pigs out.

The lesson, of course, is that investment banks need to shrink. If they do that, they can go back to being partnerships, rather than public corporations with growth-hungry shareholders. As TED puts it:

Because most of these outsiders were big, diversified institutional investors, they had an even more aggressive risk posture than the investment bankers themselves. They pushed the bank CEOs and Boards for ever more growth and return on equity, and the senior executives, being investment bankers who worship at the altar of revenue anyway, complied.

I’m with TED all the way up to his conclusion, where he seems to say that since reducing investment bankers’ pay wouldn’t be sufficient to solve incentive problems, it can’t be necessary. Maybe the existing structures work in small partnerships, and I’m happy to leave pay in small partnerships unregulated. But in large trading houses with 12-figure balance sheets, the incentive structure is clearly broken, and needs to be fixed. And since the banks won’t do it on their own, it’s down to the regulators to impose some kind of discipline. (After all, they represent the people who will bail the banks out should their bets go bad.)

Ideally, the regulators’ discipline will be harsh enough that investment bankers will leave to set up their own small-enough-to-fail shops, and the systemically-dangerous investment-banking behemoths will slowly go the way of the dinosaurs. And of course it will have to be reasonably well coordinated internationally, since investment banks are now global creatures. But I don’t think there will be any pushback from the Europeans on this front.

Paul Steiger’s salary in 2006, his last full year as editor of the for-profit WSJ: $547,692

Paul Steiger’s salary in 2008, his first full year as editor of the non-profit ProPublica: $570,000

Update: ProPublica’s Dick Tofel points out that Steiger did get options when he worked for the WSJ, which brought his total compensation comfortably into seven figures. Steiger gets no bonus at ProPublica. Not that he really needs one, given that he’s earning almost $50,000 a month.

Spiegel has a good interview with Lloyd Blankfein. They started out by asking him about his astronomical pay, and whether such sums promote greed:

Blankfein: I think we all know that greed can drive behavior, but it tends to be short term and ultimately destructive. Our leadership team stands out because most of our people have built their whole career at the firm and stayed through many years and many changes in the market. When our people leave they tend to go on to other positions — whether in government or other forms of public service — that no one would do if their were motives were financial. Those characteristics don’t make me think of “greed.”

SPIEGEL: So only modest, good people work for Goldman Sachs? We hardly believe that.

Blankfein: I have stated my honest view of things.

Of course, for every Rubin, Corzine, or Paulson — someone who made it to the very top of Goldman Sachs, became dynastically wealthy, and then went on to amass power commensurate with their wealth — there’s a John Thain or Chris Flowers, who left Goldman to make even more money elsewhere. And besides, if the motives of Goldman employees weren’t financial, why would the firm pay them such exorbitant amounts of money?

Then Blankfein tries to deflect the too-big-to-fail question:

SPIEGEL: Wouldn’t it be much easier to simply limit the size of banks? After all, the danger of systemic contagion is less when the banks are smaller.

Blankfein: So what is “too big to fail”?

SPIEGEL: When a bank is so large that in the event of insolvency, it could take the entire financial and the entire economic system along with it into the abyss. The state would then rescue the financial institution with taxpayer money.

Blankfein: The size of the bank is not the most important factor. Whether a certain risk is bundled at a single bank or spread across several is completely irrelevant. That doesn’t diminish the size of the risk. In fact, this would only change the problem from “too big to fail” to “too many to fail.”

When you have “too many to fail” — as we saw during the S&L crisis of the 1980s — the repercussions are manageable, in the way that the repercussions from the collapse of a Fannie Mae or AIG, say, really aren’t. Of course it’s relevant if a systemically-devastating risk is bundled at a single bank: then one bank’s errors can cause chaos. Besides, banks which are too big to fail — like Goldman — benefit from the moral hazard play: you can lend to them at low rates, safe in the knowledge that they’ll be bailed out if they ever get into trouble. The result, of course, is higher profits for Goldman. And more risk for the taxpayer. That doesn’t happen with small-enough-to-fail banks.

(Via TED)