Wall Street Arrives at the “Everyone Gets a Soccer Trophy” Compensation System

MF Global, the hedge fund run into the ground by former senator/New Jersey governor, Jon Corzine, is in bankruptcy. For the record, New Jersey nearly experienced the same fate when Mr. Corzine was at the helm there. The ignominious collapse carries this added bonus: A cool $1.2 bil (at least) is missing, and the bankruptcy trustee is struggling mightily to figure out what happened. The Barometer is keenly aware when one of her children has “borrowed” a twenty from her wallet. Losing $1.2 bil staggers the imagination.

Last year, MF Global cut the pay of 1,121 employees. The 10% pay cut was not truly a pay cut, just an alteration in how compensation would be paid. The 10%, instead of being doled out in cash, would be used to purchase restricted stock in MF Global for those employees. The company saved $58 million in cash compensation with this new pay plan. For those of you attempting to keep score as you make about $1,121 per week, that translated to an average of $51,739.52 per employee in the 1,121 group. The change-in-pay also meant that these employees would be subject to the buffetings of our unforgiving market. In other words, whether the 10% pay cut was indeed a pay cut depended upon how well MF Global performed.

Well, as those not living under a rock know, Mr. Crozine bet heavily on the debt of the PIGS (Portugal, Italty, Greece, and Spain). Even as Greece was torn apart by riots and its rating sank to a “don’t even travel to Greece let alone invest in it” level, Mr. Corzine bet the bank that there would always be a Greece as long as Merkel and Sarkozy were bailing out the EU. Mr. Corzine bet wrong. Indeed, Mr. Corzine bet foolishly.
Before the bankruptcy filing, MF Global shares were at $7.27. On Friday, December 2, those shares were at $0.13, so the 1,121 employees lost $113.5 million in total. One employee was outraged that the pay plan cost him $100,000.

Perhaps the employees should sit down with an MF Global customer or two to discuss losses. MF Global employees still got paid, despite working at a company that has been on a Bataan death march since it opted to believe in Greek resilience. Customers will be lucky to get $0.10 on the dollar.
It takes some nerve for these MF Global employees to be photographed and interviewed for the Wall Street Journal complaining about their pay cuts from their company when said company is in bankruptcy, its executives are lawyered up, and its documents are under Congressional and federal subpoena. Indeed, it would be easier to list the federal agencies that are NOT investigating this collapse.

The market does have its risks, and if your pay is tied to the performance of what you dabble in – i.e., trading and investing, well, the theory goes that you will use caution due to your skin in the game. The problem may not have been the 10% cash compensation translated over to restricted stock. The problem may have been that the 10% was simply not enough to motivate employees at MF Global to work at investment management with the same diligence and prudence they would employ in managing their own funds. Here’s the best part: The employees now say that they were upset about the stock compensation at the time because they didn’t want to be subject to that kind of risk.

Wall Street now follows the suburban “all children are winners” mentality – all the kids on soccer teams get a trophy, regardless of skill, results, or effort. That kind of mentality is what’s killing companies, markets, and economic systems. Irwin Stelzer was right. Capitalism without failure is like religion without sin – you are not going to get much self-improvement in either system if there is no downside. In fact, what you get is a failed company whose fate was determined by illogical, nay, foolhardy, investment decisions.

About mmjdiary

Professor Marianne Jennings is an emeritus professor of legal and ethical studies from the W.P. Carey School of Business at Arizona State University, retiring in 2011 after 35 years of teaching undergraduate and graduate courses in ethics and the legal environment of business. During her tenure at ASU, she served as director of the Joan and David Lincoln Center for Applied Ethics from 1995-1999. In 2006, she was appointed faculty director for the W.P. Carey Executive MBA Program. She has done consulting work for businesses and professional groups including AICPA, Boeing, Dial Corporation, Edward Jones, Mattel, Motorola, CFA Institute, Southern California Edison, the Institute of Internal Auditors, AIMR, DuPont, AES, Blue Cross Blue Shield, Motorola, Hy-Vee Foods, IBM, Bell Helicopter, Amgen, Raytheon, and VIAD. The sixth edition of her textbook, Case Studies in Business Ethics, was published in February 2011. The ninth edition of her textbook, Business: lts Legal, Ethical and Global Environment was published in January 2011. The 23rd edition of her book, Business Law: Principles and Cases, will be published in January 2013. The tenth edition of her book, Real Estate Law, will also be published in January 2013. Her book, A Business Tale: A Story of Ethics, Choices, Success, and a Very Large Rabbit, a fable about business ethics, was chosen by Library Journal in 2004 as its business book of the year. A Business Tale was also a finalist for two other literary awards for 2004. In 2000 her book on corporate governance was published by the New York Times MBA Pocket Series. Her book on long-term success, Building a Business Through Good Times and Bad: Lessons from Fifteen Companies, Each With a Century of Dividends, was published in October 2002 and has been used by Booz, Allen, Hamilton for its work on business longevity. Her latest book, The Seven Signs of Ethical Collapse was published by St. Martin’s Press in July 2006 and has been a finalist for two book awards. Her weekly columns are syndicated around the country, and her work has appeared in the Wall Street Journal, the Chicago Tribune, the New York Times, Washington Post, and the Reader's Digest. A collection of her essays, Nobody Fixes Real Carrot Sticks Anymore, first published in 1994 is still being published. She has been a commentator on business issues on All Things Considered for National Public Radio. She has served on four boards of directors, including Arizona Public Service (1987-2000), Zealous Capital Corporation, and the Center for Children with Chronic Illness and Disability at the University of Minnesota. She was appointed to the board of advisors for the Institute of Nuclear Power Operators in 2004 and served on the board of trustees for Think Arizona, a public policy think tank. She has appeared on CNBC, CBS This Morning, the Today Show, and CBS Evening News. In 2010 she was named one of the Top 100 Thought Leaders in Business Ethics by Trust Across America. Her books have been translated into four different languages. She received the British Emerald award for authoring one of their top 50 articles in management publications, chosen from over 15,000 articles. Personal: Married since 1976 to Terry H. Jennings, Maricopa County Attorney’s Office Deputy County Attorney; five children: Sarah, Sam, and John, and the late Claire and Hannah Jennings.
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