Why corporate 'bonuses,' though huge, are more like paychecks
Here's a good story in Monday's Wall Street Journal that breaks down the bonuses set to be paid to executives at big banks, all of which got some form of taxpayer-funded bailout.
There has been plenty of outrage over compensation from the moment taxpayers heard that executives at AIG were getting bonuses, and it's only escalated over the past year, as billions and billions of dollars have been paid out to these flailing firms.
It's easy, and, in some cases, proper to be outraged at bonuses. Heck, MIT management professor Simon Johnson thinks that executives working at any bank with more than $100 billion in total assets should either get no bonus for 2009 or should face a windfall tax if they do.
And you've heard arguments on the other side: The most experienced, smartest people on Wall Street are highly mobile because they are such specialists, and bonuses are needed to keep them working at your company. Also, quite honestly, if a trader generates $1 billion worth of business for your company, he or she deserves a bonus.
But here's another angle: denying, heavily reducing or restructuring Wall Street bonuses can wreck household budgets.
Now, before you start with the, "Okay, Frank. I'm supposed to feel sorry because Wally Wall Street can only afford a down-market espresso maker?", hang on. It's not so much how much these people make as when they make it.
Further, the move away from giving bonuses in cash and toward giving them in stock -- directly tying an employee's reward to company performance -- is not as easy as it sounds.
As the Journal writes:
Some employees say the shift could leave them short of cash, since stock comes with restrictions on how quickly it can be sold. And since many people plan their household budgets around bonus expectations, they may need the cash to cover mortgages, school tuition and other expenses.
"I don't think it's just whining," said one person at a Wall Street firm. "There are legitimate liquidity issues that people have."
Wall Street compensation packages typically are made up of two parts: a salary and a bonus. I won't say the salary is "low" because compared to what we make, it is not. I will however say that it is small percentage of the total compensation package.
So let's say a Wall Street trader has a base salary of $300,000 but has negotiated a pay package that will guarantee a range of bonuses. Let's say the trader is guaranteed a minimum of $1 million in bonuses and a maximum of $5 million for that year. That means the prudent trader has built his or her household around a $1.3 million budget. But here are the two catches: a) $1 million of his or her annual compensation doesn't arrive until after the end of the year; and b) that $1 million bonus may no longer come in cash, but may come in stock. And, given restrictions, that trader may not be able to sell the stock immediately.
So now you'll say, "Frank: anyone should be able to get by on a $300,000 salary." Well, that may be true. And perhaps by this point, you're calling me a less polite name than "Frank." But people who make $15,000 a year think probably anyone should be able to get by on $50,000 a year.
The larger point is, no matter how you feel about Wall Street and fat cats and capitalism's excesses, just think about it this way: What if your total compensation package was $50,000 a year but every two weeks you got a paycheck for a salary equal to $11,500 or 23 percent of your total compensation package? And you had to wait until January to get a check for $38,500, or the rest of your salary? Better yet, what if the rest of your salary came as $38,500 worth of the stock in the company you work for and you couldn't sell it for three months?
Something to think about.
-- Frank Ahrens
Follow me on Twitter at @theticker
January 12, 2010; 3:36 PM ET
Categories: Bailout , Corporations , The Ticker , Wall Street | Tags: bonuses, executive compensation
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