Saturday, August 1, 2009

whither executive compensation?

Bank Bonus Tab: $33 Billion
Nine Lenders That Got U.S. Aid Paid at Least $1 Million Each to 5,000 Employees

Splashed across the the Wall Street Journal on Friday (7.31.09) was the news that nearly $33 billion in executive and employee performance bonuses were paid out in 2008 by nine Wall Street banks that had accepted government bailout money through the TARP program. Despite near collapse and a necessary rescue from the government, nine investment banks still paid the executives and employees that presided over the catastrophic declines $32.6 billion in bonuses.

This news comes on the heels of reports on Thursday of last week (7.23.09) that Goldman Sachs, Morgan Stanley and JPMorgan Chase had set aside dozens of billions of dollars to pay their executives and other employees for 2009 performance. On the same day that Goldman Sachs announced that it would likely (if the pace of set asides continues this year) pay its executives an average of $775,000 in 2009, more than double that of 2008 and more than bonuses paid in 2007, a report on unemployment indicated that jobless claims increased more than expected, and the Federal Reserve expects the unemployment rate to top 10 percent by year-end.

As unemployment increases on Main Street, over on Wall Street, the song seems to remain the same. Executives and employees will receive significant performance bonuses in 2009 despite receiving government bailout funds and in many instances presiding over a near collapse of the banking industry. More shocking than the plans to compensate for 2009 is the New York Attorney General Andrew Cuomo report that $32.6 billion in bonuses were paid out in the wretched economic performance year of 2008. What gives?

Common sense seems to dictate that if performance is dismal, then bonuses should match that performance (meaning, very little should be paid in bonuses). Remember, that bonuses are paid to executives and employees in addition to salary. In the Sports context, in particular the National Football League, performance bonuses are negotiated in advance between an athlete and a professional club, and those bonuses are simply not paid if the negotiated performance is not met. Many bonuses in professional sports are team based, indicating that if a team reaches a certain level of success, then bonuses will be paid to a particular player. The NFL collective bargaining agreement even breaks bonuses down for purposes of the salary cap, into "likely to be earned" bonuses and "not likely to be earned" and those bonuses count differently toward a team's overall budget and cap number. In the NFL, bonuses are paid for successful performance and are in excess to an athlete's base salary.

Apparently on Wall Street, a much different conceptualization attaches to performance bonuses than in the world of professional sports. Nine investment banks received bailout funds rather than face collapse, and then turned around in that environment of "failure," and paid bonuses to its executives and employees that presided over that dismal performance, above and beyond salary, to the tune of $33 billion. In some ways, one could interpret this payout as taxpayers (through the TARP bailout) subsidizing the performance bonuses that were paid to executives that engaged in breathtaking risk and lost badly. As would be expected, Congress is inflamed. Edolphus Towns, the chairperson of the U.S. House of Representatives investigative panel called the payouts "shocking and appalling" and announced hearings.

Those that defend paying significant bonuses in the face of failed performance typically claim the following: (1) Wall Street must pay to keep talent at their firms; (2) that only a small group of executives or employees are typically responsible for losses and it is unfair to punish employees or executives in other areas of the business.

AG Cuomo stated: "The banks say they pay for performance. . . . Yet in 2008 there was no performance and they still continued to pay out huge sums of money."

I get the argument that individuals that were not responsible for the damning losses and egregious decision making should not be held responsible or "punished" for the "sins" of the few. Still, that argument fails to appreciate the broken executive compensation system in place on Wall Street. Over and over again, Wall Street executives have shown that they exist in a much different space than the rest of America. From the AIG "retreat" to a posh resort moments after receiving bailout funds to the $33 billion in bonus payouts for 2008 performance, those that run Wall Street seem incapable of recognizing Main Street and the human suffering that continues unabated for many based almost wholly on reckless and irresponsible leadership by Wall Street executives.

What to do about executive compensation?


  1. professor cummings:

    are bonuses in corporate america really that different from bonuses in the national football league. aren't bonuses tied into performance at most investment banks? and aren't these contractually based? it occurs to me that the last time bonuses were causing Congressional heartburn, AIG was trying to pay bonuses to employees that were contractually owed.

  2. Too-big-to-fail means that the US government guarantees bonus payments and golden parachute payments for even the most inept managers.

    It is simultaneously the most injust and economically corrosive use of the government fisc in history. Talk about perverse incentives: to get rich in America the surest thing is to kill a big bank. . .and crash global capitalism!

    Not much "change" between Bush and Obama here.

  3. anonymous:

    yes, executive compensation is often contracually specified but what "performance" is necessary to "earn" bonuses is often either unknown, easily met, or delivered in the form of stock options, etc. by my way of thinking, the entire incentive structure and pay for performance system on Wall Street is broken, inconsistent and non-sensical. a bonus for one executive at either Morgan Stanley or JP Morgan Chase in 2008 exceeded 95 million dollars.

    to professor ramirez, i agree that the recent bonus scandals are perverse. it is difficult to imagine where any other performance failure in America could earn golden parachutes and guaranteed bonus payments. the perversity of course, is that the taxpayer is subsidizing this corporate excess.

  4. I like your sports analogy. Pay bonuses if the team/firm meets certain goals. It seems that this is not the kind of problem that is too difficult to fix, but that there is no will to fix it. And, the AMerican public seems numb. I'm not sure if shaming the firms that took bailout funds and paid huge bonuses would work. Months ago, I thought that reporting this kind of conduct would shame the firms that engaged in it and inspire them to do otherwise. Or, maybe the media is not making a big enough deal about all of this. For example, Bank of America settled with investors who sued because B of A lied to them about Merrill Lynch bonuses when the 2 companies combined. This was reported in the financial press, but I'm not sure it was a big story in mainstream media. It should have been.

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