Bankers’ bonuses as a symptom of a widespread disease
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How to earn a million-dollar bonus on Wall Street: Don’t worry about your performance -- just have your firm’s compensation committee believe that you could easily get that much at a rival company.
New York Atty. Gen. Andrew Cuomo’s detailed disclosure on Thursday of 2008 bonus payments at major banks attacks what Cuomo calls a culture of ‘all upside.’
In a report -- ‘The ‘Heads I Win, Tails You Lose’ Bank Bonus Culture’ -- Cuomo acknowledges that bonuses are an integral part of Wall Street’s compensation structure. His problem isn’t with bonuses per se, he says, but with rewards that he believes have ‘become unmoored from the banks’ financial performance.’
That has happened, Cuomo says, in part because ‘large payouts became a cultural expectation at banks and a source of competition among the firms.’
He cites Merrill Lynch & Co. as an example: ‘As Merrill Lynch’s performance plummeted [in 2007 and 2008], Merrill severed the tie between paying based on performance and set its bonus pool based on what it expected its competitors would do,’ Cuomo asserts in his report.
Merrill paid $3.6 billion in bonuses to employees for 2008, even as the firm lost $27.6 billion. Nearly 700 Merrill employees got bonuses of at least $1 million. Twenty individuals got $8 million or more.
Even assuming the bonus recipients worked in Merrill divisions that were profitable, the huge payouts raise the basic question of ‘how much is enough?’ This is, after all, shareholders’ money we’re talking about.
Of course, that question has been asked about American executives’ escalating pay across many other industries over the last two decades. Egged on by compensation consulting firms hired to make sure pay is adequate to attract top talent, many companies have engaged in a never-ending game of oneupsmanship in setting executive salaries, bonuses and perks.
How to stop the spiral? Cuomo says Wall Street compensation packages ‘should be designed to promote long-term, sustainable growth and actual increases in value.’ The key there is ‘long-term’ -- i.e., a bonus system that doesn’t encourage traders, for example, to shoot for the moon in a single year, with all the attendant risks. Banks should be able to fix the compensation system on their own, Cuomo says. If not, Congress could make it so: A bill the House will take up on Friday would give federal regulators the ability to ban banking company pay arrangements that they believe would encourage ‘inappropriate’ risk-taking. (The bill also would give shareholders of all U.S. companies an annual ‘say-on-pay’ vote, but the votes would be non-binding.)
If the government were to succeed in setting ‘appropriate’ pay levels for bankers, imagine the possibilities in taking that magic formula elsewhere -- to other arguably overpaid executives, professional athletes, even Hollywood.
See what Wall Street has wrought?
-- Tom Petruno