Recent headlines that Wall Street investment banking executives have received billions of dollars in bonuses, just months after the federal government has given these same firms billions of dollars in bailout money, has greatly increased skepticism about acceptable methods of awarding bonuses. [1] President Obama condemned the awarding of these exhobirtant bonuses. "That is the height of irresponsibility. It is shameful. And part of what we're going to need is for the folks on Wall Street who are asking for help to show some restraint and show some discipline and show some sense of responsibility." [2] However, many individuals on the flip side of the coin believe these bonses are imperative to the success of the banking business. [3] This article will discuss the arguments for and against seemingly inflated bonus plans by delving into the most common types of compensation plans and their relation to the current economic crisis on Wall Street.
In order to fully understand the issue of inflated exceutive compensation, it is helpful to be familiar with the most common types of bonus plans in the marketplace. There are five main types of bonuses: the sign-on bonus, mission bonus, retention bonus, current profit sharing bonus, and gain sharing bonus. [4]
A sign-on bonus is used to attract employees to a business. [5] "Given to new employees who have just joined the company, this award serves two purposes: to establish goodwill and to buy out any compensation 'left on the table' from a previous employer." [6]
A mission bonus, or task bonus, on the other hand, is given to a team of employees who reach certain set goals. [7] These have been increasingly in popularity, particularly within businesses that specialize in softward and hardware development. [8]
Rention bonuses, on the other hand, are given to employees for no purpose other than to retain them within the business.[9] "Retention bonuses are given to employees in unusual circumstances, such as a merger or acquisition . . . These bonuses are designed to provide continuity when there is potential uncertainty about an employee's continued employment at the company." [10] With the current turmoil in the banking industry, firms such as Bear Sterns, Merrill Lynch, Bank of American Corporation, Wachovia Corporation, Morgan Stanley, and Smith Barney have all utilized rention bonuses to keep their employees on board and ensure the smooth running of the business in the midst of mergers, acquisitions, and restructuring. [11] However, retention bonuses are generally used to retain mid- level employees who keep the company running, and are not given to executives. [12]
Current profit sharing bonuses are bonuses based upon the company’s profits. [13] In a profit sharing bonus program, "[a] company sets aside a predetermined amount, usually between 2.5 and 7.5 percent of payroll but sometimes as high as 15 percent, as a bonus on top of base salary." [14] Additionally, some companies take into account the base salary of the profits, giving employees with a higher salary a higher share of the profits. [15] This type of bonus is not based upon the performance of a single employee, but, rather, is based upon the success of the business, as a whole. [16]
Gain sharing is a type of bonus program whereby an employee is rewarded for "productivity and improved product quality." [16] "Gain sharing programs pay out bonuses for statistical improvements in production and quality on a quarterly or sometimes monthly basis, providing a sense of excitement for participants." [17] These bonus programs put the ability to achieve goals and receive bonuses almost completely in the hands of eligible employees. [18]
The types of bonuses outlined above are all based upon certain factors within the workplace, be it meeting a certain individual task or a companywide goal. Typically, bonuses for Wall Street executives may fall under a combination of profit sharing, mission, and a general bonus. However, there has been much controversy surrounding the bonuses given to Wall Street banking executives because they do not appear to be tied to relevant factors, such as the success, or profitability, of the businesses they work for. [19]
Wall Street bankers, including top executives, were awarded 18.4 billion dollars in bonuses this past year. [20] Many institutions, including Lloyds Banking Group, claim that such bonuses are necessary to award employees for meeting certain targets. [21] "Lloyds . . . said its employees deserved 'financial recognition' for hitting targets." [22] Additionally, proponents of the bonus system argue, many institutions are cutting back or completely eliminating excecutive bonuses while still paying bonuses to those lower and mid-level employees who seemingly deserve them. [23]
Some proponents of this argument who take it one step further to claim that top executives deserve the millions each they received in bonuses point to the fact that banking executives generally take a small salary in exchange for a large bonus. [24] For example, "In fiscal year 2000, the CEO of Goldman Sachs earned a base salary of $600,000 and a bonus of more than [14 million dollars]". [25] While this salary may seem excessively high in itself, CEOs in similar sized, non-banking corporations generally make at least three times this base salary. [26]
Some blame Wall Street bankers for the repeated failures of the American financial system, including the technology bubble burst of 2001 and the recent housing bubble burst. [27] Those who believe individuals in the banking industry should not receive bonuses look to the current state of the American financial system. [28] "The bankers are bellyaching about a 44 percent decline in bonuses from 2007 levels. That's like complaining about being served a 40-ounce porterhouse instead of a 70-ounce one." [29]
President Obama's stimulus package limits the amount executives can receive as bonuses to "no more than a third of their annual compensation" [30] These limits would be applicable to the highest paid employees, including top executives, at all banks that have received government aid. [31] While many in the banking industry argue that the provision impedes on the financial incentive structure of the financial sector, proponents of the bill believe it is the only way Congress will agree to designate more money towards saving the financial sector.
[1] CC Holand, Are Bonuses Good Motivation- or Bad Business?, Jan. 30, 2009, http://blogs.bnet.com/teamwork/?p=616..
[2] Id.
[3] Id.
[4] Salary.com, Bonuses, http://www.salary.com/advice/layouthtmls/advl_display_nocat_Ser82_Par171.html (last visited Feb. 17, 2009).
[5] Id.
[6] Id.
[7] Id.
[8] Id.
[9] Id.
[10] Salary.com, supra note 4.
[11] Smartmoney.com, Political Storm Threatens Wall Street Bonuses by Joe Bruno, Annie Gasparro, Jessica Papini, and Brett Philbin, http://www.smartmoney.com/breaking-news/on/?story=ON-20090130-000643-1530 (last visited Feb. 17, 2009).
[12] Id.
[13] Salary.com, supra note 4.
[14] Id.
[15] Id.
[16] Id.
[17] Id.
[18] Id.
[19] The Independent, Is This the End of the Mega Bonus?, http://www.independent.co.uk/news/business/analysis-and-features/is-this-the-end-of-the-mega-bonus-1023218.html (last visited Feb. 17, 2009).
[20] Rick Newman, How Wall Street Continues to Doom Itself, U.S. News & World Report, Jan. 30, 2009, http://www.usnews.com/blogs/flowchart/2009/1/30/how-wall-continues-to-doom-itself.html.
[21] Lloyds Defend Staff Bonus Plan, BBC News, Feb. 15, 2009, http://news.bbc.co.uk/2/hi/business/7890924.stm.
[22] Id.
[23] Id.
[24] Holland, supra note 1.
[25] Salary.com, supra note 4.
[26] Id.
[27] Newman, supra note 20.
[28] Id.
[29] Id.
[30] Stimulus Bill Includes Strict Limits on Wall Street Bonuses, Feb 14, 2009, http://www.startribune.com/nation/39621292.html
[31] Id.