Wall Street’s Tin Ear; Some Bonuses Just Weren’t

This bonus thing is stirring up so much anger. Can you imagine: Now the President of the United States is engaged in setting Wall Street CEO compensation? Is Iran no longer a nuclear threat? Is GDP expanding?

We are enmeshed in one of the greatest financial upsets in modern history. But I think the anger is misplaced when it comes to the $18.4 billion of bonuses estimated to have been paid in 2008 to New York City securities workers. If taxpayers want money back, they should start knocking on the doors of people like Stan O’Neal, Chuck Prince, Robert Rubin, and Franklin Raines. (You could probably call the White House to reach the last two — they re both close to President Obama.) They spent as much as 10 years building risk into the system while pulling down eight- to nine-figure compensation packages. 

Wall Street has an amazing tin ear and has long been out of step with the rest of the world, especially when it was raking in the dough. But let’s take a look at who actually got the bonuses this year. It wasn’t the top executives that President Obama is talking about or even the upper echelon. One by one, the giants of finance have issued statements about how the top guns have said no thank-you to bonuses and how bonuses have dropped 50% to 80% for the rank and file — consider UBS, Deutschebank, Morgan Stanley, Credit Suisse.

Bonuses became a misnomer long ago on Wall Street. On average, they account for 50% of pay and can go as high as 90% . And that was part of the problem. No one really thought of them as bonuses. Employees budgeted as if they were going to get a bonus, most likely within a certain range. If they were really bonuses, no one would have counted on them, which many did even when endangering the financial system. And the only way they didn’t get a bonus is if they got fired, which plenty did in 2008.

For the most part, the people who got bonuses were not the top layer but the worker bees, the people expected to put Humpty’s financial Dumpty back together again. Think of it this way: Taxpayers extended loans to Wall Street to fix itself. Treasury and the Federal Reserve never discussed compensation with the CEOs they met; they just ordered them to take the money and heal the system. The firms fired more than 10% of the workforce and slashed annual compensation. It sounds like a plan for a recession.

It’s time to move past the $18.4 billion number and think about restructuring the industry and how people get paid going forward. Obviously, paying people to take risk is not going to work anymore. Rather, now everyone is talking the language of alignment. In a video montage on Bloomberg, numerous who-ha’s in Davos  opined on the topic of bonuses and how they failed the system. Henry Kravis spoke for many when he repeated how pay and performance now need to be in alignment. That’s a problem that also plagues Corporate America, where CEOs for years and years have raked in huge compensation packages even when performance was subpar.

Wall Street has always better than anyone else, and that has always been part of its allure. And that’s never been fair. Is an investment banker really more important than a teacher? Or course not.

Wall Street is getting the message: It is time to get pay aligned with performance. Morgan Stanley and UBS are now putting in “clawback” clauses into their bonuses, which means you won’t get everything promised if you lose money or take too much risk in later years. Until now, the incentives were structured to reward risk. That is coming to an end.

The US President has many important things to do. Setting CEO pay is not one of them. Castigating the people left holding the bag is not helpful. Figuring out how to get the economy off its knees is.

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