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February 26, 2013 9:23 AM Jack Lew’s Bonus

By Mark Kleiman

Pay for senior jobs in big financial services firms consists of salary plus bonus, with the bonus being a large part of the total. If the employee stays at the firm, the bonus decision may be fraught with tension, but it’s reasonably straightforward ethically: the bonus is intended to reward performance in the past and keep the employee working hard in the future.

If the person leaves, or announces the intention to leave, before the bonus is paid some year, the forward-looking justification for paying a bonus disappears, and the firm has to decide whether it wants, in effect, to hand the departing employee a gift, or instead cheap out and punish him for leaving. That’s life in the big city; as a result, people are likely, if they have a choice, to wait until they have last year’s bonus in hand before announcing their intention to leave.

Now imagine that someone in such a job gets an offer to take an important post in one of the federal agencies whose actions influence the financial-services industry: the Treasury, or the Fed, or the SEC, and that the offer becomes public before last year’s bonus is paid. (People offered such jobs have very little control over the timing.)

Now the firm has a real problem. Presumably it doesn’t want to cheap out. On the other hand, if it pays a big bonus, it has just made a gift to an official whose decisions will help or harm the firm. Such a payment, even if fully justified by past performance, will have the appearance of a bribe. No such problem would arise if the person left to run the Ford Foundation or the Red Cross.)

So if a firm hires someone with a public-service background and ambitions to go back into government, it makes sense to negotiate a severance bonus up front, specifically in case the person leaves to take a senior Federal job. That way the person is protected against a big financial hit if such a job comes through - otherwise he might want to take a different job now, one that’s not bonus-dependent or one where receiving a bonus wouldn’t create the appearance of impropriety - while the firm avoids the problem of voluntarily either paying or not paying a big bonus to someone who will exercise power over it in the future.

That’s the deal Jack Lew negotiated with CitiGroup, and that Rupert Mudoch’s character assassins at the Wall Street Journal want to make a scandal out of. And yet Kevin Drum wonders what the innocent explanation for such a deal might be.

In fact, what would be hard would be inventing a guilty explanation. If Citi wanted to grease the palm of someone departing throug the revolving door, there would have been no need to make the deal in advance, or in writing. The only purpose of doing so would have been to avoid what otherwise would have been a confict of interest.

It’s pretty disappointing that Jack’s well-earned reputation for integrity not only doesn’t insulate him from cheap attacks from gutter press and the gutter Republicans, but doesn’t even protect him from having smart, decent people like Kevin accuse him of wrongdoing when - to my eye - none is present.

Footnote Jack is an old friend, but all my knowledge of the bonus deal comes from Kevin’s post. The above isn’t based on any private knowledge; it seems to me like a perfectly straightforward reading of the situation.

[Cross-posted at The Reality-based Community]

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Mark Kleiman is a professor of public policy at the University of California Los Angeles.
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