Bonuses paid to Wall Street were 44% down from last year but still, at $18.4B were the sixth highest in history [official release]. While the state of New York wrung its hands over the lower tax revenues, President Obama called it “shameful”. Practically everyone in the media roundly criticized the fallen Masters of the Universe for untramelled greed.
Yet, some people who know what bonuses on the Street are really about wrote in partial defense of the bonuses. Felix Salmon writes
Now there are good reasons for having a bonus system: it incentivizes profitable work, and it makes it easy for banks to pay less money in lean years. But as Bookstaber writes, there’s definitely an implicit minimum bonus at investment banks — a sticky level below which it’s hard to cut bonuses any further.
There are reasons to have a minimum bonus, rather than baking that money into base pay: it’s not included in pay-rise calculations, for starters. But when banks start getting multi-billion-dollar government bailouts, it looks really bad if they then just turn around and spend a similar amount of money on bonuses.
I spoke to a friend of mine on Wall Street a few weeks back. His point amplifies what Salmon says. People adjust their standards of living – mortgage payments, kids’ schools being the big ticket items – to an expected compensation level that includes that implicit minimum bonus.
At Infosys bonuses in the sales organization did not have an implicit minimum. Or rather, the implicit minimum was zero. The bonus pool was decided based upon how well the company and the sales teams had done. Business heads were encouraged to have a high standard deviation in the bonus awards. And some folks did end up getting no bonus. We had arguments every cycle about the fairness of a zero bonus for people who may have tried but not succeeded in meeting their goals for the period. But ultimately, I believe, it was the right thing to do. It creates a performance oriented culture. It also gets folks used to the idea that there is no implicit minimum bonus.
The more difficult task is to convince high performers that their bonus will be zero because the company can’t afford to fund the bonus pool, which is the situation on Wall Street. High performing producers can up and leave if there are other opportunities in the market. My sense is that there was a bit of game theory going on on Wall Street. CEOs were probably thinking “I know I’ll look bad if I pay out bonuses this year after losing gazillions of dollars. But if I don’t and [insert investment bank names here] do, I’ll lose all my best performers to them and then when the market turns around, I’ll lose market share.”
But somehow I don’t think that’s what they were thinking. That would imply that they were thinking long-term and I don’t know how many CEOs on Wall Street can think beyond the next quarter right now.