How Much Does $18 Billion Really Cost

Last week’s news that Wall Street parceled out about $18 billion in bonuses more than incensed Americans and their legislators.

There’s no doubt that from a pure public relations standpoint, this collective hand out was really stupid. Do these CEOs have amnesia? It wasn’t 60 days ago when a civil war like- battle erupted pinning “Main Street against Wall Street” as the Treasury Department (lead by then secretary Hank Paulson) pleaded for Congress to write a $700 billion dollar check to bail out many failing financial institutions. To offer up bonuses to many in the rank and file so soon after this near death disaster, makes little sense and has certainly killed any lingering positive (or even neutral) perceptions about Wall Street that could have existed among the American people. No doubt, it will take a long time for trust to be rebuilt and any forthcoming bailout money will be scrutinized by Congress like never before.

But, putting aside this public relations nightmare (for a second), did Wall Street firms actually do anything wrong by letting many take home end of the year bonuses? I’d say that there is no cumulative black and white answer, just a lot of shades of gray.

Let’s talk about the clear negatives first.

-    Bankruptcy versus Bailout – The most iron clad point against Wall Street (in my mind) is that firms like Citi Group, AIG, Wachovia, Merrill Lynch and many other smaller ones were one step removed from going under. The government had to step in to either directly provide financing or help more solvent banks buy up these terminal companies so that they wouldn’t fail. If these companies had gone bankrupt, I can assure you that any bonus pool would have been close to zero. So basically, many of them financed the bonus compensation for their employees with government…uh…make that tax payer money instead of using the full sum to become “healthier.”

That is just deceptive and wrong. The firms/banks that fall into this category should be punished now.

-    Public companies – how can they justify? – The other argument I’d like to make is that many of these bailed out firms are public entities. So, while their stocks have lost 75-90 percent (in most cases), senior management still found a way to reward many through undeserved bonuses. Public companies serve shareholders first (not employees). Employees of public companies share the risk when their organization has a bad (or in this case God awful) year. Even if some departments within a particular area of a bank do well, that really should have little bearing on how compensation is doled out when the organization has made such fatal business decisions, wiping away untold amounts of shareholder equity.

Now, here’s the gray:

-    Many companies aren’t included in this bad lot and shouldn’t be – My bet is that there are a lot of mid-sized and smaller financial services players who didn’t receive bail out money and whose organizations weren’t close to failing (like those mentioned above). I actually know a few of them. Of course, propaganda isn’t pretty and all of Wall Street has been demonized through the president’s well calculated comments last week. If the average Wall Street bonus is about $110,000,  it’s important to keep in mind that the lesser known (and less publicized) firms handed out smaller sums of money that probably fell within acceptable ranges based on the fact that these organizations deserved them.

-    Bonuses are actually part of overall compensation – This is true. In fact, there are a lot of investment bankers who might make approximately $200,000 salary and then another $5 million (or more) in bonus money every year. Now, cry me a river for those bankers…because no one really cares. And again, if their banks are among those that made terrible business decisions and took tax payer money to survive, then they should just be glad that they still even have jobs moving forward.

Where I see gray are those smaller bonuses (like below six figures) handed out to lower rank and file employees from the healthier firms who depend on that money to live very average lives. Without them, their pay may be too low to adequately pay monthly bills while living in or around New York City.

In the end, my brief analysis doesn’t really matter because public perception of Wall Street is as negative as I’ve ever seen it. Ironically, most firms don’t hand out bonuses until February or March (kind of makes you wonder why so many banks snuck them in early this year, eh?). State and federal politicians, prosecutors, the media and consumers-at-large are downright angry. And, many smell blood in the air. I’d say that this collective $18 billion bonus pool is but a fraction of the real cost that this industry will be reeling from for years to come.

Comments

[Sean Williams]

Compensation is such a tricky topic. Fear is responsible for a lot of comp policy -- fear that a competitor will take your best people, fear that failing to pay out will demotivate employees, fear that your company's reputation will be damaged (i.e., thought of as "cheap.")

The problem with compensation in financial companies is contracts -- as you say, bonus makes up the largest proportion of comp, so there usually are codecils in contracts that call for a threshold bonus based on personal performance.

What is the result of failing to comply with a contract? That's another fear element for you.

The issue here isn't related to PR (we're just not that powerful in the halls of marble), it's related to the desire of many to see heads on pikes. The people who lead organizations are responsible for the strategy -- and they do need to be accountable for its failure. The rank and file, however, particularly sales people, execute the strategy. If they comply with the terms of their contracts, why shouldn't they be paid? You do the work successfully, you get paid, right?

Let's also mention the impact on the economy in general if there aren't any bonuses -- isn't there enough suffering right now? Why make it worse?

I will allow that organizations who received TARP funds now have a business partner likely to exercise "influence" over comp decisions, and rightfully so. But people who have fulfilled their obligations to their business deserve to have their reciprocal obligations fulfilled. John Thain wanted $10 million from B of A -- and he didn't get it; his performance didn't justify it. But the Merrill private banker who hit her threshold numbers in the worst market in 25 years deserves her bonus.