When Bonuses Aren't Discretionary 33 comments
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It's becoming increasingly clear that if there's a problem in the general economy with sticky wages -- employers being unable to cut costs by cutting wages, and thereby going bust -- then on Wall Street the problem is the other way around: wages aren't sticky enough.
Rick Bookstaber writes:
Employees in banks and investment banks get part of their pay bi-weekly over the course of the year, and then get the rest of their salary in the form of an end of year bonus. It is called a bonus, but a large portion of it is deferred salary. Even if they perform their job at a hum-drum level, they will still expect and get a sizeable "bonus", because, however you want to put it in technical terms, the simple fact is that when they receive their bi-weekly paycheck, some of their pay has been held back. Taking away their year-end bonus would be like telling workers on a weekly pay cycle to return the second and fourth payment they received each of the last twelve months.
Now there are good reasons for having a bonus system: it incentivizes profitable work, and it makes it easy for banks to pay less money in lean years. But as Bookstaber writes, there's definitely an implicit minimum bonus at investment banks -- a sticky level below which it's hard to cut bonuses any further.
There are reasons to have a minimum bonus, rather than baking that money into base pay: it's not included in pay-rise calculations, for starters. But when banks start getting multi-billion-dollar government bailouts, it looks really bad if they then just turn around and spend a similar amount of money on bonuses.
And it really doesn't help when the arguments in favor of bonuses look like this:
For an operations worker whose pay comprises $75,000 base and an expected 20 to 30 percent bonus, that final $20,000 or so may bridge the gap to owning an apartment, or sending his or her child to private school.
I'm sure it's nice to be able to send your child to private school, but there's no way you should be getting taxpayers' money to do so: the government is, after all, already spending good money to allow you to send your child to public school, and in fact, at the margin, your local public school would probably be improved if it had a few more parents making $95,000 a year.
For any bank employees making less than say $250,000 a year, then, I'd encourage a policy of beefing up base pay and taking it out of bonus, to the point at which the bonus becomes genuinely, rather than merely nominally, discretionary. Beyond that level, bankers are grown-up enough to be able to negotiate their pay packages on their own, on the understanding that a bonus really is just that -- a bonus -- rather than something which has to be paid out, even in a year when your bank loses tens of billions of dollars.
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This article has 33 comments:
This would de-onus the bonus!
Many non-financial companies, following the lead of Fedex, cut salaries of executives and even of middle managers, and these companies did not even apply for or receive bailouts from taxpayers. Banks should follow suit, especially those that received taxpayers' funds.
The same is true in all incentive-based sales positions. It's even true for waiters, who earn well below minimum-wage and collect the difference plus more -- sometimes substantially more -- in tips. If they drop the soup on a customer's head, forget an order, or bring a meal 20 minutes late, they don't get tips. Period.
So why encourage any other system BUT one where the incentives are tied to performance? You could argue that it creates hardship in down years, but hell... that's the case for everyone. Why shouldn't Wall Street also feel the sting?
You could also argue that it might make hiring more difficult. But then, if performance really drove incentives best when the quality of investments was actually highest, maybe every incentive-driven minion and boss of the banks would have given more thought to the ludicrous risks they've traded these last foreboding years.
The bonus was an key part of the annual salary, and if the boss extended his hand without an envelope, it was an invitation to resign, Noone could ever define exactly how the bonus was based because it was not based on individual sales.
One year the boss did not receive an employee handshake from a former professional football player who was not given an envelope. Rather the boss picked himself off the floor with a fractured jaw minus a bunch of teeth. The policy changed the next year!
I really get tired of the media ralling against companies like Exon mobil for doing a very difficult risky and important job which requirers ever increasing large capitol outlays and working in ever increasingly difficult environments for having the nerve to make a decent profit.while at the same time the taxes national. state, and local on petroleum come out to about twice the amount as the profit listed by the companies. This success is the result of good corporate governance. I have no particular affinity for (XOM) It's just used as an example.
That differs from executive bonuses, which are based on the overall profitability of the financial institutions.
I understand the rationale for going after executive bonuses but question why one would go after commission dollars that already have been earned but have not been paid. That is no different than taking away commission dollars in any other industry.
Unfortunate is the idea that bonuses are an entitlement, but that seems to be the mental state of most Wall Street types. The real question is should a bonus be eliminated or reduced as an outcome of goal achievement.
Bonus structure has gotten out of hand just as the role of 360 reviews. Those reviews have weaseled their way into compensation structure when it reality they are for development.
Seems as though the leaders and decision makers of corporate America have lost sight of performance and work ethics.
suppose you have a bank that is going to lose 100 million. you contract a new ceo and promise him 25% of what he manages to salvage. he saves 50 million. doesn't he deserve the 12.5 million bonus? that concept was borrowed from neil boortz.
On Jan 31 02:55 PM Roger Knights wrote:
> How about paying Wall Street employees a portion of their salaries
> in call options on their employer's stock, with a strike price a
> bit below the market price that month? The worker would automatically
> get more or less depending on how well the company did. (This scheme
> would certainly require some clever tweaking to make sure it behaved
> properly, or at least not outrageously, in every scenario, but I
> didn't want to bore anyone with the details.)
>
> This would de-onus the bonus!
2) Workers deserve bonuses when they do an exceptionally good job, as defined by profits. No profits = no bonus and your job is in jeopardy. Net loss = You're fired!!
3) The idea that excess compensation is needed in order to retain workers who are LOSING money for the firm is moronic and absurd. Managers who think this is true, deserve to be fired, YESTERDAY!!
And these bankers create this financial crisis, get billions in our taxpayer money and then want a bonus for craeting this carnage. What did they learn in these private schools - cheat, lie and steal and get a bonus????
I work an average of 60 -70 hours a week and am compensated by my billable hours spent on SUCCESSFUL projects. If I fail to do the work adequately of the project is unsuccessful, I don't get paid and am usually fired,
If these bank employees knew they would only receive bonuses when their company was successful, then maybe they might have been more proactive in calling a bad deal a bad deal and this debacle would not have progressed to the point that it has destroyed the world's financial system.
I think that the upper management and boards of these banks are lucky that they are not all hanging form every light pole in New York.
So much for capitalism. If the government has to bail these suckers out, then we should own the company, or at least a commensurate amount of stock and the taxpayer should share in the profits when they eventually get back to doing good business again.
In the mean time-suck it up, like the rest of us are now forced to do.
Gee... that's scary... sounds kinda Bolshevick... maybe I need to get in touch with myself... maybe a weekent at the Ventana Inn with the boys of AIG! We're all shareholders now... right?
The problem is the executive ranks. The pay for performance contract has been harmed - people get upset when companies are cratering, taxpayers are making bad investments, and executives are making millions for poor performance. Their 500k to $1m salaries are more than enough to live on - at least at the Fortune 500 level (in terms of salaries). Let's agree on the peformance level and then we can talk pay. I'm willing to pay for real "Alpha" level peformance.
To me this is deferred salary and needs to be accured if true. Otherwise like all other bonuses it should be tied to company objectives and goals. Most of which Wall Street had a no hitter on for the last two years.
Jimbo above has it right.
It is time Wall Street drank from the same medicine they have pro-offered the average voter for the last 8 years.
On Feb 01 06:27 AM Augustus wrote:
> I'm waiting to read about the awards of any bonuses to the CNBC employees.
> They yammer along about the horror of the bonus at firms receiving
> any govt. assistance. Well, GE sure has got some assistance. So,
> should the CNBC employees get any bonus? I would expect that CNBC
> had a very profitable year. They sure expanded the programming and
> must have had lots of eyeballs glued to the programs. In my view
> they deserve some probable bonus, their operation must have really
> been profitable. Listening to the yammering there it would seem
> that there should not be one for them since they are part of the
> bailed out GE. I would sure like to see a report on how it is handled.
I really did not see a bias by the reporters to removing biases. On the contrary, I heard much discussion as to why they were needed ot retain workers. Which is kind of nonsensical to me, as I am sure there is a glut of "talent" available to work. And I bet they are willing to work for "salaries" instead of "bonuses." Also, I wonder if they would like to have a "salary" instead of nothing at all. Which will most likeley be the case if the taxpayer patience with banks needing "bailouts" dries up.
Whether the reporters received bonuses or not is also entirely irrelevant, as their employer is NBC and only indirectly GE. Also, I fail to see how their reporting has sunk the economy like Lehman brothers did.
Of course, they'll have to throw more people out in the streets who are behind payments if they are forced to show better (short term) earnings for bonuses for a change.
Politicians and Wall St. have gotten used to excesses I can't find parallels for in such size and masses. It seems quaint that Dan Kozlowski from Tyco was roasted for his excesses, at least he showed large profits.
That these people can grab trillions like it was nothing is shameful and ominous. Now Obama's plan is supposed to spread the graft, it looks like, I would say, to grease more trillions for the rich. I'm afraid this is an opening act and we're brainlessly marching towards complete fascism. Ill-gotten gains aren't easily given up.