We think it’s great that people are delving into failures like Merrill Lynch’s compensation plan to look for the roots of the problem.  This investigation is especially important given that Congress seems likely to pass legislation that will dictate what Wall Street can and can’t do in paying employees, as the federal government tries to rein in the excesses that contributed to the Great Recession.

From our standpoint, there certainly seem to be problems with Merrill’s approach. It tried to encourage caution by having executives put a portion of their salaries at risk, by placing the money in a fund that was used to buy Merrill stock. But then Merrill decided that it would add to those funds, contributing as much as 2.5 times what the individuals put in.  That contribution meant executives were staring at a potentially huge payday if they could drive up the stock price, and, lo and behold, they took risks to try to do so.

There may be a broader lesson here, though. That is this: No matter what Congress legislates, there are so many smart people on Wall Street and so much money involved that people will find a way to get around the intent of the rules. Whatever Congress decides (and we realize there are many people who think Congress is on a fool’s errand entirely and should look for other ways to rein in excesses), it perhaps should build in a mechanism for revisiting the compensation issues every year or so, to see how Congress’ intent has been circumvented and how the legislation should be revised.