"Guaranteed Bonuses Return To Wall Street"
It’s already been reported that Wall Street banks are getting back to their pre-crisis compensation practices. But the New York Times added another wrinkle to the story today, noting that some banks — including those ostensibly owned by the U.S. government — are “reviving the practice of offering ironclad, multimillion-dollar payouts — guaranteed, no matter how an employee performs”:
For a short time, banks had stopped offering guarantees, after the financial crisis turned their profits into losses and as Washington began to scrutinize their use of public money. But now, with banks apparently rebounding after two consecutive profitable quarters, some have resumed the practice, arguing that such bonuses are needed to attract and retain top performers.
The usual suspects — Goldman Sachs, JPMorgan Chase and Morgan Stanley — are back to offering guaranteed bonuses, but so are Citigroup and Bank of America, the financial behemoths still living off of government bailouts.
The problem with a guaranteed bonus is that it is completely unhinged from any sort of performance metrics. With no serious downside, the bankers are encouraged to go all-out in search of profits, as going bust entails little personal financial risk. “Is Wall Street again going to overpromise, and then when the market turns down, we’ll have another set of pay problems?” asked Alan Johnson, a pay consultant who specializes in financial services.
In a report released last month, New York Attorney General Andrew Cuomo revealed just how disconnected bank bonuses are from the performance of those who receive them. “Two firms, Citigroup and Merrill Lynch suffered massive losses of more than $27 billion at each firm [in 2008],” Cuomo wrote. “Nevertheless, Citigroup paid out $5.33 billion in bonuses and Merrill paid $3.6 billion in bonuses. Together, they lost $54 billion, paid out nearly $9 billion in bonuses and then received bailouts totaling $55 billion.”
If the complete failure of a firm is not enough to alter employee pay, then what is? As the Miami Herald’s editorial board wrote yesterday, “it’s time to bring a measure of common sense to the realm of executive compensation”:
Before adjourning for the August recess, the House passed a measure that puts new constraints on executive pay, enabling regulators to ban payments that produce “perverse incentives” to take risks that could damage the financial system. Think high-risk mortgages, the kind that brought down the housing industry. The Senate should follow suit when it returns to work next month.
As Lucian Bebchuk wrote, “regulation of pay in financial institutions is justified by the very same moral hazard concerns that provide the basis for existing regulation of the sector.” However, there have thus far been no indications from the Senate that the bill will do anything but languish. But maybe the stories emerging about Wall Street’s return to the status quo will change some minds?