This Is the End


Markets, Risk and Human Interaction

January 30, 2009

Banker Bonuses and Proportionate Pain

For a start, we can stipulate that there are a lot of people in the banking industry (and especially in the subset of that industry which, up until September of this year, would have been called the investment banking industry) who are still making obscene amounts of money while the companies generate losses for the shareholders and force taxpayers to cough up bailout funds. And then there are the end of year bonuses paid to employees. Attacking the second does not get us very far in addressing the first.

Employees in banks and investment banks get part of their pay bi-weekly over the course of the year, and then get the rest of their salary in the form of an end of year bonus. It is called a bonus, but a large portion of it is deferred salary. Even if they perform their job at a hum-drum level, they will still expect and get a sizeable “bonus”, because, however you want to put it in technical terms, the simple fact is that when they receive their bi-weekly paycheck, some of their pay has been held back. Taking away their year-end bonus would be like telling workers on a weekly pay cycle to return the second and fourth payment they received each of the last twelve months.

We are talking about the workers who install and maintain the computers, do the back office accounting, run the HR functions, generate PowerPoint presentations and maintain the client relationships. Some of those accountants are called traders, and some of the PowerPoint generators are called investment bankers, but most are a far cry from the multi-million dollar traders and investment bankers that we read about. There are a lot of extras and bit parts in movies, too.

Before getting too apoplectic, let’s at least look at the breakdown. My bet is that the majority of bank workers whose bonuses Obama finds outrageous and Dodd wants to claw back are workers who get modest base salaries during the year and whose bonuses make up more than half of their total salary. These bonuses already were cut far below those of prior years. If they are already seeing their annual salaries cut by forty percent or more, do we go further?


  1. You must be thinking back to the time when most investment banks were partnerships and had to be sure they retained enough capital to finish the year if things went south! I don't believed there is bank in the world that is publicly owned that uses the model you suggest. Only private partnerships in law, medicine and other professions retain part of salary and pay out a "draw" during the year. Please give some examples of your assertion that these "bonuses" in question are actually deferred salary!

  2. You are right that the origin of end-of-year bonuses was to divvy up profits. It is a model that no longer makes sense in the huge banking corporations. But it is used none the less. Although for some "producers" and "rain makers", it still is reasonable, my point is that for most people it is not reasonable. Indeed, the end-of-year bonus does not function as a discretionary payout based on performance -- based on in a sense how much money you brought in the door. If you are a senior accountant, you expect to be paid $150,000 for the year. You get $80,000 in your bi-weekly checks, and the $70,000 as a "bonus" at year end. But that bonus is basically part of your expected salary. It might vary a little bit, but not by too much. Because your alternatives to working in the bank would pay you a similar amount.

  3. Rickster - [its been a while since I finished Demons. Nick Murray recommended it in his NMI newsletter a while back. Coming off Roger's R&F of LTCM, your piece was nothing short of masterful. So much great knowledge beyond the (yawn) topic of hedge funds.]

    I agree with your post here from a pragmatic standpoint, since thats what you offer. But I think its a weak defense, albeit the correct conclusion.

    Notwithstanding the influence of nationalization, and the baggage that brings, I must still hold out for the notion that the majority of shareholders should be in the position to decide what's "fair" or "enough". The howling of politicians is simply the signal of politics, nothing to do with economics of a particular industry, or enterprise within it.

    The nice thing about being part of the howling class, is that you can impose great costs on others while doing so at very little cost to oneself (Chris Dodd, The Story of; Barney Frank, ditto; Madoff: How the SEC fell asleep at the Wheel), and of course provide oneself enourmous cover for the things you've not done well, all at once.

    I would say this ranks about as serious an issue as the concerns of Congress a year past with Roger Clemons, The Patriots "videogate", and all esle they had their attentions glued to while the economy was coming unglued.

    But its really all about votes.

  4. "Some of those accountants are called traders, and some of the PowerPoint generators are called investment bankers" - nice one, Rick, will remember it.

  5. This is the most prepostrous explanation I've heard. Every company I've ever worked at paid bonuses at the end of the year only if the company had profits for the year.

  6. Strange but true. You can call it a bonus, but if you are a mid- or lower-level employee, you are thinking 'the rest of my salary'.

  7. What you're forgetting is that for most people in most of the country, a $80,000 salary (w/o any bonus) is pretty darn good; as is just the $70,000 bonus.

    Any plan that pays out a bonus nearly equal to salary is terribly flawed.

  8. "Any plan that pays out a bonus nearly equal to salary is terribly flawed."
    My reading is that is exactly what Rick is saying. Many people, perhaps even most people, who work for these banks are taking a below market salary for their work, thinking they will make it back in bonus at the year end. When that bonus doesn't materialize or worse is announced and then taken back, that is equivalent to being underpaid, sometimes severely, for the work done throughout the year.

    80K is a pretty darn good salary, but when colleagues doing similar jobs in other industries are making 50% more up front...


Note: Only a member of this blog may post a comment.