More on Bonuses

This Wall Street bonus debacle has me irked and probably you too. The gist of the issue is twofold: Merrill paid out bonuses in December before it was acquired by Bank of America and total Wall Street bonuses were over $18 billion in 2008 according to New York City's comptroller. Let's take these in order.

Traditionally, Wall Street pays its bonuses in January to defer taxation for the employees. Since the deal closed in January, Merrill rushed to get them out before the deal. This is a bit shady in my opinion. Merrill (and Bank of America for that matter) would no longer exist if not for the TARP funds, which then paid a portion of the bonuses.

Not being discussed much however, is that the NYC figures of $18.4 billion in bonuses were paid in 2008. Wall Streeters get quarterly bonuses and that figure was down 44% from 2007's. So what we really have is the first few quarters' bonuses being reflected in that $18 billion number. The fourth quarter bonus must have been paltry compared to the usual. In fact, it is likely that a big chunk of that amount was the 2007 fourth quarter bonus (4Q is the big bonus) being paid in January 2008.

Also not being mentioned much, is that compensation on Wall Street is largely variable. What is called a "bonus" is really a performance pay formula. This helps company's keep compensation roughly in line with profits. Often the "bonus" or variable pay portion is more than half of someone's total compensation. A trader may have a base salary of $100,000, but make over half a million depending on their numbers. To call that a "bonus" is like saying a software salesman gets a "bonus" when they make a sale and collect their commission at the end of the quarter or a waiter gets a tip as a "bonus"- it's part of their incentive pay rather than an extra gift of profit sharing. Nonetheless, the public can't help but beel disdain for someone pulling down a couple hundred thousand or more because of TARP when jobs are being lost everywhere and Wall Street is a significant causal factor in the whole mess. Personally, I don't think they they deserve it either.

We've got a conundrum here in that firms are getting billions from TARP and have to pay the contractual, formula driven pay- where else is the cash going to come from? Well, they could substitute stock for cash (this wasn't broken out of that $18 billion figure that I saw; it might be half stock awards which hurt existing shareholders far more than taxpayers. In fact, some Swiss banks made the bonus pool upwards of 60-80% stock). They could say everyone is going to work for a fraction of what they expected- afterall without TARP, there would be no employer.

In sum, don't think that bonuses weren't cut significantly- they were. Don't assume those bonuses were for performance after things hit the fan. Don't assume a "bonus" is actually a "bonus" rather than formula driven compensation. And don't assume Wall Street is completely innocent or justified in the matter either (not that you would). Between cancelled planes, bonuses, scandals and a bottomless pit of losses, Wall Street needs to get its priorities straight and start thinking about what's right or it is going to hurt itself more in the long run. The public opinion, regulatory and political backlash is going to be much harsher than they imagine. I guess Wall Street is just too narrowly focused on the short run to notice. Sigh.