Wall Street Bankers: Rewarding Failure

Includes: C, GS, JPM, LEH, MER, MS
by: Ron Haruni

Wall Street compensation has emerged again as a hot topic. According to British newspaper, The Guardian, financial workers at Wall Street’s top banks, are to receive pay deals worth more than $70 billion for their disastrous work so far this year. The irony of this new development is that they will be paid despite the fact of how badly their respective firms are doing or what shareholders in financial firms have lost.

However, what makes the story even more interesting is that a substantial proportion of the compensation is expected to be paid in discretionary bonuses. Many companies provide discretionary bonuses at holiday time, at the end of a successful project, or if the company achieves unexpected or unusual success. Now, we do not really subscribe to the notion that banker compensation is the major issue here - perhaps, the remaining investment bankers are simply being rewarded on a meritocratic basis for their hard work and contribution to the profitability of their specific division.

Wall Street banks played a significant role in plunging the global financial system into crisis, causing the financial markets to disrupt the system’s capacity to allocate capital (which consequently brought investment to a halt). Awarding $70 billion in compensations not only completely ignores the realities of the situation, but also reinforces the notion that failure is rewarded.

In the first three quarters of this year, notes the paper, Citigroup (NYSE:C), which earlier this week along with other major U.S. banks received billions of dollars from the U.S. government as part of its bailout plan, accrued $25.9 billion for salaries and bonuses, a 4% increase from last year. At Goldman Sachs (NYSE:GS) the figure was $11.4 billion, Morgan Stanley (NYSE:MS) $10.73 billion, JPMorgan (NYSE:JPM) $6.53 billion and Merrill Lynch (MER) $11.7 billion. At Morgan Stanley, the amount put aside for staff compensation also grew in the last quarter to the end of August by 3% to $3.7 billion.

Many critics of investment banks have questioned Wall Street’s compensation philosophy in terms of why firms continue to siphon off billions of dollars of earnings into bonus pools rather than use the funds to shore up their capital position.

None of the banks contacted by The Guardian wished to comment on the record about their pay plans.