The Banks and Their Bonuses

For a guy who has been so outspoken about the unfairly positive treatment the banks are receiving over the past year, I am really torn about this whole bonus thing. For those of you who don't know, millions of Americans, including prominently newly sworn-in president Barack Obama, were disgusted and outraged to learn on Thursday that Wall Street paid out $18.4 billion in cash bonuses to its New York City-based employees at the end of 2008 / beginning in 2009 for fiscal year 2008. Many of these banks are the very institutions that received between $10 and $50 billion of taxpayer funds from the TARP program to help stabilize their capital bases and keep them in business as we suffer through the most trying financial crisis since the Great Depression. News that these firms that needed billions and billions of dollars of our money to survive the over-risky positions they got themselves into are now paying out billions and billions of dollars in bonuses to their employees cannot be expected to be taken well.

That said, this isn't nearly as cut and dried as many, including the new president, seem to think it is. In the banks' defense, what they call "bonuses" are not really bonuses in the sense that most non-bank employees think of that word. Having come from that industry myself, I can say with total positivity that this isn't like some other jobs I have had, where you get paid whatever your salary is, and then in a good year maybe they kick you 5 or 10% on top as a year-end bonus. Maybe you get it, maybe you don't, but either way you make your salary and that's what your real pay is. At the banks, the compensation model is completely different. The base salaries at many of the banks, even for those investment bankers making $5 and $10 million a year, generally top out well under a million dollars. It is not uncommon for even the highest-paid bankers in the industry to receive a salary close to $250,000, and then receive their millions all in a bonus at the end of the year, making upwards of 80% or more of their total annual compensation in that year-end bonus.

Now, you may not feel bad for the guy making 250k base salary if he doesn't get his $3 million bonus this year. And I'm not necessarily disagreeing with you on that one. But that example was just to give an example of how the bank compensation model works, to show how totally different it is from essentially all other industries where the bonus is merely a nominal amount of extra cash on top of the base salary already received. It's important to understand that these $5 million bankers aren't taking home $4.5 million in salary, and then also expecting a 500k bonus at year's end. The vast, vast majority of the highest-paid bank employees' compensation comes in that year-end bonus.

The issue is more pressing once you step down the ladder a bit from the highest-paid bank employees. It would not be uncommon for a senior vice president-type at a bank, let's say a non-banker and non-trader, to make maybe 6, 700 thousand dollars a year, but again more than half of that money coming in a year-end bonus. I believe I have said here myself that my own compensation at the bank was more than half in a year-end bonus. The fact of the matter is -- and most people, including the president, don't seem to quite grasp this -- is that it's not nearly as simple as just paying no bonus to all the bank employees in 2008. Not only was more than half of my total compensation coming out of my bonus at year's end, but the base salary I was paid was below average for my field in this area. Far below. Now with the bonus, that more than makes up for any shortfall, but the whole compensation model in the banks is set up like this. Mostly everyone gets paid well below average on the base salary, and then gets bonuses that make them whole (and then some, in many cases) at year's end. Think of waiters and waitresses, who are not even required to be paid minimum wage in salary because it is understood that their tips will get them where they need to be. With bank employees, that's the same function that the bonus serves.

So my point in all this is just to show the folly of simply saying that no banks should pay any bonuses this year because of the problems they have had. All of the good employees would leave in a heartbeat (as well they should) if they got no bonuses, because the entire industry would be grossly undercompensated then, compared to market averages, and even compared in many cases simply to the amount those employees would need to meet their expenses for the year. Forcing all of the best talent to leave the banks by deliberately keeping them from being able to support their families would be a foolish strategy that no one could really support with logic. And yet so many people this week seem to be saying just that. Even President Obama seemed to suggest that the banks who have received federal help this year should not be paying out any bonuses. That is a ridiculous assertion and it is something which should not be done in the middle of a year like this. If you want to tell the banks that they can't pay bonuses in future years, then fine, this gives the banks the chance to determine who their best people are and to raise the base salaries of those employees so that, starting next year, their need to receive a bonus just to be able to meet their expenses is alleviated. But saying that the banks shouldn't be allowed to pay any bonuses this year because of their current troubles is something that only someone with no understanding of how not-truly-discretionary those bonuses really are. I know plenty of people at the banks making 70k in salary with 70k or more in bonus, working a job that any non-bank would pay that same person 120k base and little to no bonus for. I don't see how the answer to this year's financial crisis is to make that guy get by for a year with just 70k in salary.

All that being said, the banks might have really just screwed themselves royally here with these bonus payments. As much as everything I've just said above is undoubtedly true, the bottom line is that the $18.4 billion in bonus payments coming out of Wall Street for 2008 is the sixth largest aggregate bonus pool on record for the banking industry. In fact, $18.6 billion in bonuses basically just takes the banks back down to the bonus levels they paid out in 2004, when the market and the economy were chugging along just fine:



Paying out the sixth-largest bonus pool in history in a year that has seen this kind of carnage and that saw many of the banks needing billions of dollars of taxpayer funds to stay afloat certainly does not sound right to me. All these effers had to do was tell their employees what I solemnly guarantee you they were mostly expecting anyways, which is that bonuses, while still coming, would only be roughly 20% of last year's record levels due to the current calamity in the industry. Yes, some people would have left their jobs as a result as I mentioned above, but not nearly in the numbers that would be more or less forced to go if you paid them no bonus at all. While you can't really pay someone 60% of market salary and then give them no bonus and expect them to stay, it is much more palatable to pay them 60% of market salary and then give them only enough of a bonus to be making around the average level of compensation for their positions, or maybe even a bit under average, given the year we have just been through in the financial sector.

If the banks were smarter, they would have paid out 20 or 25% of last year's bonus levels instead of 40-50%, and gotten the aggregate number down below $10 billion. Again, paying no bonuses is simply not reality given the sub-market base salaries all the banks pay their employees, but somewhere in the $9-10 billion range in total bonuses would make all the difference to me. Then the banks would have been able to claim that they are paying bonus levels that were paid out in the mid 1990s, which is right in line with where the stock prices are now for the most part. And this frankly makes sense to me since I know the banks have to pay out some bonuses to enable their employees to get up to at least close to market compensation. Why they had to go and pay out the 6th highest aggregate bonuses in history just boggles the mind, doesn't it? Clearly, Wall Street is out of whack with what is fair and what is right in this environment. And to think that it is their sector which not only is most directly feeling the brunt of the troubles but also is essentially the cause of the whole crisis, that just makes this $18.4 billion figure stink to high heaven all the more.

I say that the banks might really have screwed themselves here, because even though President Obama has been outspoken in his understanding of the necessity to save our banking system as quickly as possible, it's not like this guy is a friend to the rich bankers like many of our recent executives could fairly be called. Obama is not looking to help the super-rich by any means, and regardless of his stated desire to save the banks in general, the guy will still have plenty of discretion when it comes to exactly how that is executed. Obama could do a lot of things to hurt the individuals employed at these banks who paid out such ridiculous bonuses that Obama on Thursday referred to as "outrageous" and "shameful". The solution to the banking crisis could include clawbacks of executive and other compensation paid to employees over the past year or more. It could include requirements that executives involved in these bonus payout decisions step down from their posts, all of them. Given the shameful, outrageously greedy and out-of-touch behavior these banks have just shown the new president, he might be far more willing to endorse a solution to the banking crisis that involves a total wipeout of these banks' existing equity, or one that requires the banks to feel the pain of fully writing down all their troubled assets before his new proposed "bad bank" will buy their assets.

The 2008 Wall Street bonuses were a great chance for the country's largest banks to show the new administration how contrite they are, how much they are tightening their own purse strings, and just generally how clearly they recognize and accept their own role in the financial crisis and the economic tumble that has overtaken the United States and the rest of the world over the past year or so. Instead, those mf'ers showed Obama and his team just how entitled they really are, and just how out of touch they are with the rest of the free world. When you've got the guy who's about to make major decisions regarding your entire company's and entire industry's future calling you "outrageous" and "shameful" at the very same time he is engaged in discussions about saving your industry, you know you fawked up. Big time. And now, let's all hope they have to pay the price when the latest "solution" is finally crafted by the Obama team.