Banking Bonuses : Good, Bad and Confusing

Though the progress made in the last quarter of 2009 seemed to be a sign that the economy is beginning to turn around, we are still in a recession, and unemployment continues to hover around the 10 percent mark. When thousands of Americans are out of work and doing everything they can to continue providing for their families and avoid losing their homes to foreclosures, it is incredibly revolting to hear that bank executives will receive record bonuses just a year after the big Wall Street bailout. Americans are understandably upset about this, but they are missing some very key reforms that are combating the laissez-faire mentality that has enriched bank executives for years on end.

Like most non-bank executives, I cannot imagine receiving a six- or seven-figure salary, let alone an eight-figure salary. I tend to get very jealous just thinking about how hard someone like me would have to work to get even a fraction of that money. But just like most non-bank executives, I don’t really understand how Wall Street works. It may be tempting to criticize these banks for earning massive profits in such a bad economic time, but not only are these companies being completely consistent with their type of business, they are operating under rapidly changing circumstances where they are finding more limits on their freedom to set compensation.

Banks typically set aside a large portion of their funds with the intent of compensating their executives based on the prior year’s performance. Most of these companies use half of this money for bonuses. Even when you set aside the expected populist outrage at the amount of money being earmarked for compensation and consider that these banks have also been bailed out by the government, it’s hard to make the argument that an executive deserves a bonus for good performance. Still, some executives and Wall Street experts argue that the fact that the banks were able to pay back the bailout money means that their performance was excellent in a harsh economic climate, meaning that the bonuses are completely justified. The public tends to disagree with this view, forcing banks to scramble to please them to some degree while continuing their practice of giving out bonuses.

Executives and board members have been very careful with the amount of money going to compensation, fully aware of public opinion on this matter. Bank of America put in place provisions that would allow them to take back money from its executives if the bank’s performance ends up being less than expected. Goldman Sachs has reduced its compensation from 50 percent of revenue to 43 percent in the third quarter of 2009. JPMorgan did the same, reducing the compensation from 40 percent to 37 percent by the third quarter of 2009. Citigroup’s CEO even decided to forgo his bonus and receive instead a salary of $1.

Nevertheless, Goldman Sachs will pay its employees an average of $595,000 per person for 2009, while JPMorgan will pay out $463,000 per person. Cutting back a few billion dollars from still more billions does not make much of a difference to a skeptical public, but it is more than one would expect from Wall Street prior to the recession. Voluntarily reducing the budget for bonuses is not the only limitation being placed on the banks in this area, however. Another tactic to placate the angry bailout-weary public has been to convert payment from dollars to shares in the company. This hasn’t worked out as well as they may have intended, however, as the focus in this new year is not on whether they receive more stock than dollars, but what the total dollar-value of bonuses ends up being.

With such public scrutiny, it should please the anti-Wall Street people to hear that shareholders are gaining greater oversight over these companies, reserving the right to vote on the bonus amounts rather than leave that decision to the board of directors. Too often these board members are executives of other financial institutions, voting to increase each other’s pay, which creates an overcompensated “executive club” with no oversight. Wall Street’s nature may be to reward large sums of money, but more and more the shareholders are deciding how much is appropriate.

So, is the populist outrage completely unjustified? I don’t believe so. There are several key changes moving Wall Street in a direction that I like, but some things will always be beyond us non-executives. Perhaps we can never understand why these executives must be paid so much money, regardless of the economic situation. Perhaps others feel the bailout money was improperly spent and too much went toward salaries instead of investing in the economy.

In any case, for Wall Street to make any sort of concession when they hold all the cards is in itself a pleasant surprise, and rather than lament that the system is so unfair, giving billions to some while thousands struggle in an economic downturn, we should continue pushing the reform that is slowly taking hold. If the system is so unbalanced, we cannot act defeated and disappointed – it is up to us to continue holding their feet to the fire and force them to make even more concessions and changes. Consider this bonus-giving season a sign that Wall Street can be turned around.

Kerry Wakely is a second-year English major. He can be reached at kwakely@uci.edu.