Wall Street Bankers: Rewarding Failure

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 (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 (GS) the figure was $11.4 billion, Morgan Stanley (MS) $10.73 billion, JPMorgan (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.

Comments

[john s. gordon:]

claw back bonuses when the firms performance is so abysmal.
> jack

2008 Oct 20 09:08 AM

[venividivici:]

These disgusting people will never take their snouts out of the pig trough because they are never punished in any sort of meaningful fashion for their misdeeds, just continuously rewarded.Why would they change?
Bush's latest pronouncement on the enduring advantages of American capitalism was breathtaking. How can there be a solution when you have this sort of mind boggling denial.

2008 Oct 20 09:27 AM

[sumosama:]

so what is your thesis...no one who works at a bank should get paid? If you had summarized executive pay as a percentage of total pay, maybe I would agree, but to lump ALL compensation is ignorant. Would you close all the banks and lay off all the employees?

2008 Oct 20 11:34 AM

[jimmy46:]

Stock options are a major part of the problem,

THE IRS SHOULD TAX OPTION GRANTS AT THE TIME THEY ARE GIVEN,

using the Black scholes formula.

This would reduce the appeal of options and the gambling nature
of CEO's.

2008 Oct 20 01:46 PM

[P.O.ed:]

Just yesterday there were about 3 - 5 links that came up while doing a general topic search on Google. Now there are dozens!! Think about this, when you have to pay your taxes, you are in essence, writing out your check to the Wall Street Banks to bankroll their $70 Billion in bonuses: Goldman, Merrill, Citi, Morgan, etc.

Spread the word, "National Walk-Out Day" Monday, November 3, 2008, 2:00 p.m. CST.

All Americans who are disgusted with this payoff are asked to stop whatever they are doing and walk out of their jobs, stores, schools, and any other place they may be at that time to show the elected officials, of this once great nation, that we the Citizens of the United States of America will no longer tolerate these actions. Only health care and public safety are not encouraged to participate due to the nature of their positions.

Stand up and stay united as they cannot terminate, expel and neglect the fact that over 250,000,000 Americans are saying, "Enough is enough!"

2008 Oct 22 09:09 AM

[phat cat:]

There is another take on this. As most of these financial stocks have plummeted over 60%, some even more, there's a tax consequence to those who are granted stocks. Assume at a tax rate of 35%, if those bankers have not sold their company stocks, they are essentially paying all the bonuses to the IRS. For those unfortunate ones who's stocks drop below that threshold, they are in negative territory. So everyone should just relax as everything works out at the end.

2008 Oct 23 11:35 PM