Banker's bonus tantrums

‘Heads I win, Tails you lose’ Culture:

All of us have read enough about the causes of last year’s economic downturn from myriad sources, but the issue of banker’s bonuses was sublime and hitting the news-deck time and again. Bank executives claim bonuses are tied to performance, whereas the real scenario portrays a clear disconnect between compensation and bank performance. All the excessive risk taking by various investment banks in boom times never fetched long term market value to the firm, but earned large bonuses to their executives.
For example, Merrill Lynch (merged with Bank of America in 2009) paid out $3.6 billion in bonuses despite suffering massive losses of more than $27 billion for 2008 and received TARP bailout of $10 billion. Goldman Sachs earned $2.3 billion, paid out $4.8 billion in bonuses, and received $10 billion in TARP funding. (See table below for info on other banks)



Let us discuss few arguments in this regard:

1. Top CEOs often get huge payoffs even if they run their firms into the ground and are fired. For instance, Lehman Brothers CEO Richard Fuld received almost half a billion dollars in compensation in the long financial expansion from1993 to 2007. Stan O’Neill at Merrill Lynch received $166 million as a going away present, Charles Prince, the CEO of Citigroup, was paid $68 million upon his release after the firm’s collapse.

2. Irrational compensation structures and bonus bidding wars were born out of fear of ‘poaching’ of firm’s employees by its competitors. This harmed the entire industry, thereby forcing firms to continually increase bonus levels.


3. Firm’s justify large bonuses in bad years by arguing that new boom will inevitably develop when the crisis is over, and since no one knows which future market segments will be most profitable, it is prudent to pay large bonuses to retain all key employees to make sure the firm is well placed to profit when the
boom arrives, no matter what its form.

4. Employees working in profitable market segments should not be punished by smaller bonuses for the low profits or losses generated by those in other divisions. In other words, huge losses from a tiny number of staff like Merrill blew about $20 billion just on mortgage-related products – more than offset the profits from other successes.

Forbes Bonus ranking - Banking industry CEO's for 2008:



When the subject-matter is ‘bonus’ , as you all know, there is no end to arguments, so also, a rationale concluding remark. Therefore, I feel the reform must be within and not outside – it might sound philosophical but it’s an undisputable fact. I would like to recollect here the statement by present CEO of Citigroup, Vikram Pandit, who said ‘I will take a salary of $1 and no bonus until the bank, which has accepted $45 billion in government bailout money, returns to profitability’


In a NUTSHELL - Real scenario:

An investigation into compensation practices in the American banking system reveals: ‘when the banks did well, their employees were paid well - when the banks did poorly, their employees were paid well - and when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well.
“Total compensation and benefits at the publicly traded firms analyzed by the Wall street Journal are on track to increase 20% from last year's $117 billion -- and to top 2007's $130 billion payout. This year, employees at the companies will earn an estimated $143,400 on average, up almost $2,000 from 2007 levels”