Despite Mr Buffet, no CEO is worth $20 million a year.

Dimon looking smug

No wonder so many recent pictures of J.P. Morgan’s CEO show him looking smug. Must be nice knowing you’re worth a salary of $20 million? [1]

But this cash waterfall is unethical.

No so, argues the normally sane and responsible Warren E. Buffett  of Berkshire Hathaway

 

I think he’s worth more than that.

Despite Mr Buffet, over the top executive pay attracts growing public anger. Stakeholders and investors too are concerned. Politicians also realise this issue won’t go away.

 

We have no evidence that CEOs are fashioning, with their executive leadership, more effective and efficient enterprises. [2]

Since the 2008 financial crisis, judging top salaries solely by whether someone brings in loads of profit makes less sense.

Instead, they are increasingly viewed in the wider context of income inequalities across society. A big chunk of the 100 U.S. corporations (25%) for example, actually pay their CEOs more than the company’s entire federal corporate income tax bill. [3]

Financial rewards are therefore on every company’s moral compass. Corporate outlays for CEO compensation — despite the lingering Great Recession — are rising. Employment levels have barely rebounded from their recessionary lows. Top executive pay levels, by contrast, have rebounded nearly all the way back from their pre-recession levels.

Business ethics is about how boards conduct themselves. The vast Dimon pay-out is therefore an ethical issue, since the board sets the tone from the top.

 

…reputation, culture, conduct is to be the driver and profit comes second in any choice” Sir David Walker, Chairman on Barclays addressing a government Commission in 2012. 

To make sense of Dimon’s monster pay-out, his Board needs to consider:

  • Is it a reward for failure?
  • Is it fair?
  • How does it relate to the bank’s long term prospects?

cash mountain1)  Reward for failure?

Dimon guided his firm to three years straight of profits; the share price remains rock solid. Judged solely in these narrow terms no one would call him a failure.

But this so-called respectable enterprise has a remarkable and continuing record of unacceptable misbehaviour. Its most recent regulatory penalty of $13bn [4] is the equivalent of giving £125 to every man woman and child in the UK.

Another way of viewing Dimon’s tenure is he runs a bank zapped three times the previous largest ever regulatory punishment—the $4 bn levy against BP for the Deepwater Horizon oil spill. Worse, the list of ongoing regulatory enquiries stretches far over the horizon.

Despite the healthy share price, the long running sore of unethical bank behaviour has already led some shareholders to call for Dimon’s resignation. For example, a petition to the Federal Reserve Board of Governors in 2012 attracted 40,000 signatures. This claimed

 

…he personally approved a very risky trading strategy that not only lost billions of dollars for the firm but also had the potential to destabilize the world’s financial markets.”

Others have been even more explicit:

 

While Dimon may not have been directly involved in violating any laws, he has always run this bank like his personal kingdom, and has complete control of every aspect of its operations. As such, he needs to take responsibility for the situation that his bank finds itself in today.” [5] 

Relentless scrutiny of his firm’s misbehaviour continues to tarnish Dimon’s public image, perhaps irreparably.

Once seen as the white knight of the financial crisis now he’s the boss lumbered with the bill for Wall Street’s misdeeds. With no end to the bank’s legal fights in sight, is Dimon on his way out?

Fairness protest2)   Fairness: How does Dimon’s pay relate to what the average employee earns?

Fairness may hardly be top of J.P.Morgan’s agenda, that is, how Dimon’s pay relates to earnings lower down the organisation–a gap continuing to widen in many sectors

Remuneration is an ethical choice. This is a core business of every board and there is always a moral component, including one of fairness.

At Citigroup last year, for example investors rejected a plan to award the CEO Vikram Pandit $15 million. Corporate governance advisers criticized Citigroup for failing to link earnings to performance. Later in the year the Board replaced him.

JP Morgan’s investment bankers each earned around $217,000 in 2012. [6]These are the big buck makers. Yet Dimon’s salary is 55 times their annual haul. The gulf between him and the remaining grunts toiling in the lower echelons hardly bears thinking about.

In the 1950’s CEO’s made around 20 times what the normal employee earned. The 1980’s saw this double.  Today the multiple is between 350-1000 the average employees’ pay! Such disparity is as much an ethical issue as bribery or other forms of misconduct.

No formal rules exist stating what a CEO ought to be paid. Nor the ideal gap between them and the lowest earner. This is the whole point of ethics—having a moral compass, doing what’s right, not hiding behind an absence of an explicit law.

Dimon’s absurd reward perhaps already exceeds the 1000 times score mentioned above. His board may not see it as an ethical issue, the rest of society will do.

prospects chart3) Prospects: How does it relate to the bank’s long term prospects?

Over the last decade J.P. Morgan rewarded its investors with consistent returns. This continues with Dimon at the helm.

In his most recent letter to shareholders he was triumphant.  He reported with pride $21.3 billion in net income for 2012, which he said marked the third consecutive year of outstanding results.

Legal issues dented the figures. Serious law entanglements will continue far into the future. Eight different federal agencies are currently investigating the J.P. Morgan’s ethical and business performance.

To sum up, the bank’s handling of uncertainty remains dire. As a recent detailed financial analysis concluded

 

..banks that fail to manage risk can post record profits for years before suddenly collapsing. And like its Wall Street peers, JPMorgan faces considerable risks.” [7]

Under Dimon there is a myopic focus on today’s bottom line. Will this be at the expense of long-term investors? The risk stemming from unethical practices become ever more apparent. How long before Dimon’s cash cow hits the ethical buffers?

 



[1] P. Eavis, Big Raise for JP Morgan’s Dimon Despite a Rough Year, New York Times Jan 24, 2014

[2] S. Anderson et al, Executive Excess 2011: The Massive CEO Rewards for Tax Dodging, Institute for Policy Studies

[3] See 1 above

[4] 8bn GBP

[7] I. Moscovitz and J. Reeves, Why You Shouldn’t Invest in JPMorgan May 17, 2013, The Motley Fool

 

 

 

 

 

 

 

 

 

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