Bonus, Blankfein?

I didn't get a performance bonus this year. Truthfully, I don't deserve one (it wasn't my best year, performance-wise)--and besides, my congregation, like most other nonprofits, is struggling to meet our budget this year.

Not so with bonuses at Wall St. firms. Apparently, they're pretty good this year. Might even be a record year for bonuses, according to the Wall St. Journal.

A good number of folks are upset by this--righteously upset, I might add. The basic objection seems to be: for an industry that just got bailed out by taxpayers, and in an economic climate with high unemployment and general stagnation, it's bizarre and morally objectionable for the banks to be leveraging taxpayer subsidies to pay out huge individual bonuses to executives.

Here are a few important nuggets from the Journal article:

"The surge in bonuses comes barely a year after the government bailed out the U.S. financial system amid the worst economic crisis in generations. This year major U.S. banks and securities firms are poised to pay their employees a record amount in compensation and benefits—about $145.85 billion, according to the Journal's analysis.

The growth reflects a rebound in the banking industry's revenue to pre-crisis levels. The firms in the analysis are on pace to report $450 billion in revenue, a 25% increase from 2007. Overall, pay is on pace to be equivalent to about 32% of revenue, a decline from 40% in 2008....

Total compensation and benefits at the publicly traded firms analyzed by the Journal are on track to increase 18% from 2008's $123.4 billion, and 6% from 2007's $137.23 billion payout. This year, employees at the companies will earn an estimated $149,192 on average, up almost $3,000 from 2007 levels.

Some companies cautioned that the projections might be too high, which suggests they might trim their pay levels for the fourth quarter in response to public anger. Citigroup, Goldman and Morgan Stanley have also told workers that their bonuses will contain a bigger percentage of stock. The banks believe that paying staff with more of the firm's own stock (which tethers an employee's income to the firm's performance and also usually comes with restrictions on how soon the stock can be sold) will demonstrate sensitivity to anger over the rapid pay rebound.

The increase in both revenue and compensation is due partly to the industry's consolidation during the financial crisis. J.P. Morgan, for example, acquired Washington Mutual Inc. and Bear Stearns Cos. Bank of America bought Merrill Lynch & Co. and Countrywide Financial Corp. Those deals inflated revenue and compensation because the acquirers' financial results now include the purchased companies....

Many firms reiterated that they need competitive pay packages to keep from losing employees to non-U.S. companies, private-equity firms and hedge funds.

While Wall Street firms such as Goldman and Morgan Stanley have historically set aside about 50% of revenue for compensation, the rate is lower at commercial banks...."

What are the issues here?

1) Companies have a right, I concede, to compensate employees as they choose. I don't want the government messing around with pay structures for businesses (EXCEPT when it comes to ensuring the decency of a fair MINIMUM wage). Compensation decisions are rightly up to boards of directors. In that case, the onus lies on shareholders of publicly traded companies to sponsor shareholder resolutions creating stricter parameters for compensation. This is happening: Goldman is being sued by a shareholder, despite having "reformed" its compensation structure, replacing cash with stock. Goldman is also trying to sneak its way out of such a shareholder resolution on a technicality!

Of course, one danger with shareholder activism is that such resolutions will backfire if successful, creating the perception (which, in the market, is reality) that the company will become less profitable without competitive compensation levels. But more on that below...

(BTW, I still don't understand, as per the article above, why banks compensate based on "revenues" rather than on actual profits. Can someone explain that to me? Why would you compensate someone based on adjustments to a balance sheet that didn't necessarily result in real, long-term value to the company?)

2) A second ethical question is: should the government tax the bonus money? Of course--but through regular business and income taxes, not with a special "bank tax," as has been discussed. That strikes me as reactionary, and there's no guarantee that the costs wouldn't be passed right along to bank customers. A progressive taxation system that taxes the wealthy at higher rates than the poor should be sufficient without vindictively targeting banks or bankers. The better issue for the government to pursue is closing existing tax loopholes, which cost our nation hundreds of billions of revenue every year, and other reforms that would make the tax system truly progressive.

(Again, I wonder whether we'd even be talking about taxing bonuses if bonuses came out of profits rather than revenues.)

3) Finally, the bonuses themselves: are they too big... are they "immoral" big? As shareholder resolutions work themselves out, and as the banks make feigns at having a moral conscience, it seems to me that banks CAN pay what they want to employees. But just because someone CAN do something, we all know that it does not mean they SHOULD.

The bonuses are recent phenomenon at the banks. As my old man notes: "the bonus system grew dramatically during the boom of the past decade as a way of both attracting AND retaining ‘top talent’ in banking and financial services. In my view, this has now turned into a ‘tragedy of the commons’ in which they argue that they cant give it up, because all parties wont cooperate and the ones that defect by cutting bonuses will lose their ‘top talent’ to those who still pay the bonuses." Basically, no bank will take the risk of being the first to challenge this ludicrous system.

Then there's the question of the individual character of the person who claims to need that kind of money to perform. Is that the only thing that makes a person show up, bring energy and creativity to a job in finance? Strikes me as kind of sad. Or, morally, something akin to bankrupt.

And do people really work harder, perform better when that kind of money is on the table? As a parting shot, check out this TED talk from psychologist Dan Pink, who says, definitively: NO. According to Pink, the notion that people work harder and/or better when big money is at stake is just wrong. We're not wired that way.



So what have we got in the end? Wall St. bonuses are inefficient, a drag on profitability, they present a false (and deplorable) incentive for employee performance, and they exacerbate public anger against an already maligned and unpopular industry. I can't wait to see which bank plays this card first.