Last week, the Federal Reserve announced the results of an inquiry it made into the structure of pay packages on Wall Street, noting that many are still “deficient” and encouraging too much risk. “While many firms are using or are considering various methods to make incentive compensation more risk sensitive, many are not fully capturing the risks involved and are not applying such methods to enough employees,” the Fed found.
Prior to the financial meltdown, one of the biggest problems with Wall Street pay was the guaranteed bonus, which was given to a particular trader or executive regardless of whether or not his or her work was a benefit or detriment to the company. The New York Times referred to them as “ironclad, multimillion-dollar payouts — guaranteed, no matter how an employee performs.” And according to Bloomberg News, the guaranteed bonus is back:
Firms are adding jobs for the first time in two years, rebuilding businesses cut during the financial crisis and offering guaranteed payouts to lure top bankers…The demand for investment bankers and traders has led some firms to offer pay packages as high as $8 million, including guaranteed bonuses, which are paid regardless of an employee’s or the company’s performance, recruiters said. That recalls Wall Street compensation practices before the credit crisis forced banks to cut more than 345,000 jobs worldwide.
“When markets fell to hell in a handbasket, people were lucky to get a job with a base salary, and everything else would depend on their performance,” said Richard Lipstein, a managing director at Boyden Global Executive Search, a recruitment firm. “As we start to see people being recruited from one firm to another, as opposed to being recruited from unemployment, the need to make some kind of guarantee is becoming more necessary.”
It’s not hard to understand why a guaranteed bonus would be problematic if the goal of restructuring pay packages is to make them more sensitive to risk. After all, a guarantee is just that: given regardless of performance. Though other money is likely tied to an individual executive’s performance or lack thereof, a guaranteed bonus gives him or her little reason to not make huge bets, as a substantial sum of money will still be there even if the gambling doesn’t pay off.
When Wall Street handed out its 2009 bonuses, former Citigroup CEO John Reed said that “there is nothing I’ve seen that gives me the slightest feeling that these people have learned anything from the crisis. They just don’t get it. They are off in a different world.” It doesn’t seem that another six months has changed that assessment.