Bank CEO Pay: From Bad to Worse?

American Banker just released our second annual bank Executive Compensation Special Report. It shows that the bosses of about 160 banks received median raises of 11% last year and a combined 28% over the past two years.

At a time when many workers consider themselves fortunate just to have jobs, and raises are minuscule to non-existent, such gains at the top run the risk of setting off a fresh wave of populist anger. That's especially true in banking, which is arguably the most vilified industry around.

Across all industries, CEO pay has swollen to 1,800 times what the average worker makes. One of the main culprits behind the top-dog pay inflation is "peer benchmarking," or the practice of paying bosses based on what similarly situated CEOs make, writes Broc Romanek, editor of CompensationStandards.com.

"For nearly two decades, compensation committees have routinely set CEO pay in the top quartile of that for their peers. This practice inadvertently created a slippery upward slope." in which the "average" inexorably rises, Romanek adds. It's like living in Lake Wobegon, where every CEO is above average.

To me, the fact that the top men and women make vastly more than the rank-and-file is not in itself a problem. I'm a capitalist — but one who believes vast wealth should only result from vast wealth-creation. Bill Gates built Microsoft from nothing. Sergey Brin and Larry Page did the same with Google. I don't begrudge them a dime. I'm less comfortable when the hired help is made hugely rich by taking risks with other people's money (especially taxpayers').

Under the current system, the inflationary pressure on CEO pay that's exerted by peer benchmarking is exacerbated by boards that are too cozy with management and big shareholders who are often too quick to go along. At times, it feels like a cloistered ruling cabal lives in its own dream world apart from the rest of us.

At JPMorgan Chase, CEO Jamie Dimon's compensation committee consists of three of the most richly paid members of America's ruling corporate elite. That helps explain how, even after the bank's London Whale debacle prompted the committee to cut Dimon's pay 19%, he walked away with $18 million.

What worries me about where executive pay is headed is that we risk stumbling from one highly flawed system to another that may be worse.

Regulators, for example, are pushing companies to replace peer benchmarks with "absolute" ones. Under the new regime, a company might declare that a CEO will receive a bonus if it achieves a set return on assets, regardless of how its peers do. The problem is that with nothing to compare the company to, boards may set the hurdles too low. Nor does such a system do anything to eliminate the risk that managers will fudge the numbers to hit their goals.

Regulators, it seems, are nevertheless fixated on reducing risky behavior by minimizing use of performance-based pay, especially stock options, Susan O'Donnell of the consultancy Pearl Meyer & Partners told me this week.

We certainly learned during the past two financial crises about the perils of lavishing bankers and other corporate bosses with too many options. From Enron to Lehman, the prospect of lavish paydays encouraged outsized risk-taking and resulted in corporate calamities that left millions of innocent victims in their wake.