The Deal about Bankers’ Bonuses

Many people believe that top bank executives today earn way too much. Nearly everyone is further enraged when these overpaid bankers appear to have made significant mistakes and have been blamed for their part in the collapse of the economy, and yet still get substantial bonuses. The Attorney General of New York has even gone so far as to issue a subpoena to Bank of America to get a copy of their most well-rewarded employees. Perhaps knowing the public outrage, the ousted CEO of UBS, Peter Wuffli, has decided to return about $10m in bonuses. What Banks Are Doing Bankers are doing everything they can to pacify their critics. Golden Sachs announced that they would not be giving bonuses this year to their top executives. The same thing happened to other major banks such as Barclays, UBS and Deutsche Bank. Other banks are expected to follow. Limiting the bonuses of senior executives may seem to be the easiest solution. However, the real headache is the bonuses for employees below the senior management. Although their individual bonuses cannot compare to the top executives’, they still make up the bulk of the bonus pool. Even though Goldman’s top brass will go without a bonus this year, the rest of the employees will still get about $11.4m in bonuses. What the Public Is Saying It doesn’t seem to matter that this amount is almost 35% below last year’s total bonus pool. It doesn’t seem to matter that the bonus rate is expected to decrease by at least 30% every year until the economy gets back on its feet. It doesn’t seem to matter that the actual people who made the risky bets in subprime mortgages have long resigned, and the people left in the bank are those who are cleaning up the mess that was left behind. Hearing that a bank – especially a distressed bank that received federal funding to rescue it – is giving out millions in bonuses to its employees could be very unnerving at the very least. The public is decrying this seeming waste of taxpayers’ money. What the Bank Must Do The problem is that banks cannot afford not to pay bonuses this year. First of all, not giving the agreed reward for meeting targets is just wrong, and would cause employee morale to plunge down to even lower levels. Top performers would be tempted to jump ship and transfer to a more stable, more financially rewarding position in another company which is in better shape. In addition, there are departments in the bank which are still performing well, and it is very unfair to punish them for the mistakes of people from other departments. What the Bank Must Do Like UBS, banks must negotiate a better payment scheme for their employees, which will closely link performance and pay. However, when analyzing an employee’s performance, the long-term results should be considered and not just the short-term consequences. The problem with focusing on the short-term is that people would tend to take in risky investments that would probably pay off within a year, but may not be profitable or wise to have in the long run. GP