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?