Judge's Refusal of BofA / Merrill Bonuses Could Unleash Reality on Financials

Oh, that Judge Rakoff is such a spoilsport, refusing to bless the SEC's settlement with Bank of America (BAC) on the Merrill Lynch (MER) bonuses.

The Times said today that the judge (a nice man who once terrorized me in Contracts class) may hold a hearing to find out whether the bonuses - all $3.6 billion - were necessary. More specifically, he'd like to know if Merrill's management really tried to figure out "how many of the roughly 39,000 bonus recipients would have left had they not received their payouts."

In response, Bank of America's lawyer said the bank could prove "there were a number of companies that might have hired Merrill’s employees.” Which is nice, but doesn’t really address the judge’s concern.

Rakoff is asking about the process: Did the board ask management to prove these bonuses were essential, and did management meet that burden? To do so, I think, would have required them to muster empirical evidence on the following points:

- Exactly which employees were likely to stomp out the door if they got smaller bonuses, or no bonuses, and how management knew this in advance.

- Whether all hell would really break loose if some of these folks left.

- Whether or not the firm could recruit, on the streets of Lower Manhattan, some dazed but qualified victims of Wall Street’s bloodbath who'd be willing to work for less than $3.6 billion.

Did the board ask for such factual backup? I’m guessing no. The “science” of executive compensation is a strange kind of science, in that it’s pretty much devoid of both evidence and experimentation. Year after year, public companies assert in proxies that their compensation programs are exquisitely designed to retain each indispensable, irreplaceable employee. A less generous pay scale just wouldn’t do the trick, we’re told. But few firms tell us how they know this. Nor do they road-test different compensation schemes.

For empirical research on whether compensation methods actually work the way they're supposed to, we’ve got to resort to academics. Like these guys, who concluded a couple of years ago that stock options encourage foolhardy risk-taking. Hey, how about that.

How can you say your compensation structure is efficient and effective if you never experiment with a cheaper one, even when the world is coming apart at the seams and you have a perfect excuse for cutting pay?

Thanks to a crabby guy in robes, one company may soon have to answer that question.

Comments

[contrariwise:]

Well done, Wendy!

Aug 12 03:24 AM

[jasonjim:]

Good for the Judge. It is about time that somebody seriously questioned the need for these ripoff the shareholder bonuses to already overpaid, spoiled, and thoroughly dispensable employees (most of them anyway).

Aug 12 06:57 AM

[john s. gordon:]

'must pay bonuses or employees will leave'.
what a copout.
how many will actually leave when there is noplace to leave to?
will the last person leaving wall st please turn out the lights.
> jack

Aug 12 09:00 AM

[chun12082038:]

yeah, I think even we don't have to give tips to the servers too, we already paid for the food , why they had add 15 % service charge on top

Aug 12 10:10 AM

[shootpar2001:]

Be careful what you ask for...........
Yes, many a 'wall st. fatcat' is/was overpaid!!
But we all know that SH*T flows downhill.....look at last month's employee wage report (Negative).
As we devalue what the top-tier earns; we devalue the rest of us who are trying to climb that 'ladder'.
As we mentally devalue the services that everyone else supplies to us, we also devalue ourselves, for those at the bottom (minimum wage) this is economic russian roulette; you merely survive or get blown out of the job market. As our gov't pursues a populist agenda and devalues the 'fatcats'; I ask.... where are the $$$$$ going to come from??????????

Aug 12 10:41 AM

[paul:]

Without knowing each situation and if the salaries were sub standard with a commission for increased business, it is difficult to comment. Somewhere there has to be contract that stated why the "bonus" was to be paid. Tough to do for 39,000 individuals.

Aug 12 05:53 PM

[BIG-T:]

Shootpar-Banker wages have no effect on the rest of the working world's wages but do have an effect on the Bank's stockholders' return on investment. How did you come to the conclusion that what a Banker earns, affects a Laborer or Technician,s wages? Based on the Bankers' recent losses of our investments, I think they should all be investegated for fraud....not given bonuses.

Aug 12 05:54 PM

[dukeow:]

Look at it this way. 39 thousand is about 2 army divisions, which have a General in charge. His pay is perhaps $200K a year max. And a few perks.

A company that runs tens of thousands on payroll that demands these super bonus payments might be better served if a lot of these would be "working" elsewhere. And distribute a bit of savings to shareholders.

Aug 14 08:47 AM