(Taxpayer-Financed) Bankers’ Bonuses Redux
On January 6, we published a guest post by eFinancial Careers writer Jon Jacobs. In it, Jon argued that it is essential to allow financial institutions to continue paying out bonuses and incentive pay to employees, in part to stave off what he called “a Destabilizing Round of ‘Musical Employers’”:
The political spotlight on compensation poses both near-term and longer-term risks to financial institutions, Jon said in his post. An obvious near-term risk is that an institution reining in year-end incentives more severely than its peers might lose talent to competitors early in 2009.
Rivals both traditional (other bank holding companies) and non-traditional (boutique and mid-market investment banks and alternative investment firms) are waiting in the wings, eyeing opportunities to poach star contributors.
Not So Fast — Bonuses Are Lower, But Employees Aren’t Circling Chairs
Jon’s concern about the necessity of bonuses and incentive pay may not be borne out by the facts. According to this story in the New York Times, bonuses for 2008 fell 44%.
What effect did receiving the same bonuses as they did in 2004 have on employee retention? A negligible one, according to a Harvard Professor and expert on executive compensation quoted by the Times:
“This was neither the sixth-best year in terms of aggregate profits, nor was it the sixth-most-difficult year in terms of retaining employees,” the Times quoted Professor Lucian A. Bebchuk as saying.
Tax Dollars Funding Financial Staffers’ Unearned Windfalls?
Whether or not year-end bonuses and incentive pay are necessary to keep employees, it’s almost certain that the money to pay for many of these bonuses are coming from our tax dollars in the form of the government bailout.
That’s right. Whether you work at McDonald’s, as a secretary, or are under- or- unemployed, your tax dollars are probably being used to pay bonuses to many of the financial sector executives who caused the recession in the first place.
While Bank of America was acquiring Merrill Lynch, for instance, Merrill “[paid] $4 billion to $5 billion in bonuses despite new, gaping losses that forced Bank of America to seek a second financial lifeline from Washington.
While no one is yet completely certain that our tax dollars are funding executives’ bonuses, the fact is that 1. the federal government has provided billions of dollars to financial institutions with the intent that those institutions get credit moving again by giving that money out in loans; and 2. According to the Times “Professor Bebchuk said he was concerned that banks might be using taxpayer money to subsidize bonuses or dividends to stockholders. ‘What the government has been trying to do is shore up capital, and any diversion of capital out of banks, whether in the form of dividends or large payments to employees, really undermines what we are trying to do,’” he said.
Another expert quoted by the Times called on the government to enforce transparency on the part of financial institutions which are receiving public money.
“’We are all flying in the dark,’ Jesse M. Brill, a lawyer and expert on executive compensation, said. ‘Companies can simply say they are trying to do their best to comply with compensation limits without providing any of the details that the public is entitled to.’”