Wall Street Bonuses Spur Outrage
MICHEL MARTIN, Host:
Now for Wall Street. Those student loans may be a small fortune to recent college grads, but the numbers are small change compared to the multimillion dollar bonuses that are returning to Wall Street. Last week, investment bank Goldman Sachs reported surging profits. And by the end of the year, analysts report the firm could distribute as much as $23 billion in bonuses for 2009.
That figure would represent twice as much as the firm set aside for bonuses in 2008, and the number is all the more striking, because it comes just a year after taxpayers stepped in to stabilize Goldman and the other big banks with billions of dollars in bailout money. On the Sunday morning talk shows, lawmakers and White House officials took note and criticized the bonuses.
Unidentified Man #1: The bonus is an issue is because people are frustrated that Wall Street is back to a behavior of having just basically four months ago been in a different situation. And the only way they got out of it is through the good graces of the government and the taxpayers.
MARTIN: I think what they need to understand is on the same day that you saw stories about these bonuses, you saw a story about how wages are at a 19-year low.
Unidentified Man #3: These firms on Wall Street need to understand that what they're doing by providing these bonuses, particularly when they received so much federal money, is an outrage on the country.
MARTIN: Wall Street firms have said that they need these bonuses for performance in order to keep their best employees on board. So what about it? Are these bonuses just another Wall Street greed fest or a necessary tool to keep the strong players on the job?
To talk about this we called Sylvia Maxfield. She's associate professor of management at Simmons College at Boston. She's also a former senior sovereign analyst at Lehmann Brothers. Also with us Emmy award winning journalist Valerie Coleman Morris. She's the host of "With the Family in Mind," a CBS network radion program about money matters. Welcome to you both. Thank you for joining us.
SYLVIA MAXFIELD: Thank you for having us.
VALERIE COLEMAN MORRIS: Thank you.
MARTIN: Sylvia, $23,000 billion as we said, almost twice the bonus money set aside by Goldman Sachs just last year in 2008. What's the justification? Are the bonuses straight arithmetic? A percentage of profits are automatically distributed to employees? Is it contractual? Is it just custom? How does it work?
MAXFIELD: Well, it's arithmetic. So they're setting aside 43 percent of net revenues, so that's everything that they've earned this year minus their costs. And they say that that is a lower percentage than they have set aside at times in the past.
MARTIN: And so does everyone participate in the bonus pool? For example, secretaries, do they get part of the bonus pool, or is it all management?
MAXFIELD: Everyone participates, although the really large bonuses are going to go to the folks who were at the center of money-making operations for Goldman. So senior folks and, in this case, folks who were on the trading floor, which is where most of the revenue came.
MARTIN: You can understand where the outrage is coming from, obviously, from the standpoint of just how it sits - how it feels sitting, you know, out there in the public reading the papers. But from your standpoint as a person who both worked on Wall Street and now studies it, is this - and I obviously think that there's a kind of a political or moral judgment involved here, but is this justifiable?
MAXFIELD: Well, it's been the practice for many, many years to award most of your compensation in terms of bonuses in the financial sector. But what we've seen since 1980 is a huge uptick in the difference between financial sector wages and overall wages, and I think that's where the outrage comes. And that's been because the sector's grown a lot and it's been very profitable, and the practice is you want to keep your star employees, you've got to pay them a big bonus.
It doesn't feel very good to those of us who haven't seen a raise in a couple years or are seeing our benefits cut away or have been looking for a job for a year.
MARTIN: Valerie, what's your reaction? As a person who works primarily with individuals who are working primarily to enhance financial literacy, how common is this as a wage structure for people to get most of their compensation in the form of bonuses or deferred compensation of stock, and how does it strike you?
COLEMAN MORRIS: Well, a couple of things. Number one, I think that we should look at what bonuses were really meant to do. I don't believe they were ever meant to be a guarantee. I think they were kind of the carrot, and they were based on performance. And so the problem with Wall Street's bonuses now in the current environment as far as I see it is that people are getting paid anyway.
You know, they get paid for selling stock. They get paid for the transaction. They actually get paid even if you lose money. So where's the risk that's involved in their job? And because bonuses were used to motivate performance, which I certainly think is good, but it was for performance that falls to the bottom line. Now they really are getting paid irrespective of circumstances, and I think that is what is concerning and has angered Main Street. I mean...
MARTIN: But if it's a percentage of profit, though, if it's a percentage of profit, couldn't you make an argument that it is based on performance?
COLEMAN MORRIS: Oh, I think that in many places, it is based on performance, but we're talking about what's the public's reaction to it. And I think that understandably generates a controversy. I think it generates anger. The reality is we live in a capitalist society. I believe in it, and I think that's good, and compensation should be based on long-term results, not on short-term speculation.
MARTIN: We're not getting ours, why are they getting theirs? And it's kind of like what do you mean, bonuses after a bailout? Even though Goldman has paid their $10 billion back to the government.
MARTIN: That was what I was going to ask. So there is - the government cannot intervene in this bonus structure, if I have this right, Valerie, because Goldman has paid back the money that was originally lent to it by the government?
COLEMAN MORRIS: Goldman, I understand, paid back the $10 billion government bailout plus dividends, and then Goldman had a spectacular third quarter - I mean, more than $3 billion. So in large part, the good performance of Goldman is getting lost in this story of Wall Street bonuses and how the public is reacting to it.
MARTIN: If you're just joining us, I'm Michel Martin, and this is TELL ME MORE from NPR News. We're speaking with financial journalist Valerie Coleman Morris and Sylvia Maxfield, associate professor of management at Simmons College. We're talking about the bonuses on Wall Street. They are back, they are large and they are attracting attention. We're talking about whether these are justified or not.
Sylvia, one of the arguments is that this is a way to keep key players on the job, but given the contraction on Wall Street with, what, three of the five major firms are now no longer existing, is that really true?
MAXFIELD: I think that we'll see that practice erode, and there is a discussion about changing the structure - for example, having a claw-back, which means if the performance doesn't keep up for some period of time, two, three years, that the individual who was paid the bonus would actually have to pay back a portion of it.
So I do think we're going to see some changes. We have to see some changes, because public sentiment is so negative.
MARTIN: I was going to ask you that. Why do you think there is some move afoot to change compensation, but why, given as we mentioned that the actual lever no longer exists at this particular firm? Where's the impetus for change?
MAXFIELD: Because we're going to see increased regulation of the financial industry in general coming out of Congress, and we've been seeing lots and lots of hearings and discussion and debate.
You know, Goldman made this money operating essentially as a hedge fund, and there is a huge discussion out there in Congress and in the political world about further regulation of hedge funds, and hedge funds have been pushing back.
So we've seen incredible deregulation of the financial industry in the United States since 1980, and we're going to see that pendulum swing back. And part of that may be some laws that actually guide what these firms can do, broadly. You know, the government's not going to get involved in individual decisions, but I do think that practice will change either because of the fear of regulation or because, actually, regulation does get passed into law.
MARTIN: And finally, Valerie, what about those regulations that the administration is contemplating that would enhance protections for consumers and transparency and so forth? How likely do you think that is?
COLEMAN MORRIS: I am hoping, and I'm kneeling to more of the expert who teaches economics, Sylvia, and I think that what her statements that she just made are very valid.
My concern is regarding the argument that Goldman says it needs to pay these large sums to retain its best people or they're going to risk losing them to rivals. You know, with this money that's been set aside for compensation and bonuses, the Times says that that's around $700,000 on average for many of the company's 31,000-plus employees.
MARTIN: I think the whole idea of we've-got-to-pay-them-or-we- lose-them is a smokescreen of just trying to keep things the way they are. I think it's disingenuous. Look at outside opportunities right now. They are fewer for everyone. And if you're getting a $700,000 bonus and you're making a $225,000 salary, on average, I don't think you're going to walk away from the job. I don't think there is this additional risk that if you don't pay them a lot, you're going to lose your biggest and your brightest. I don't think it's true.
MARTIN: And Sylvia, what about you? Very briefly: true, not true?
MAXFIELD: You know, I think that the industry over-fired, and so there is some hiring going on. And the bottom line is for those top traders who are making huge sums of money on a week-to-week basis, they can leave. They will be snapped up in a minute by any of the other top firms if they let it be known that they're not happy with their seat. So at the very high end, that argument holds.
MARTIN: Well, we'll see. Sylvia Maxfield is associate professor of Management at Simmons College. She joined us from member station WGBH in Boston. Valerie Coleman Morris is an award-winning financial journalist and the host of "With the Family In Mind," a CBS network radio program about money management, and she joined us on the phone from Tucson, Arizona. Ladies, thank you both so much.
MAXFIELD: Thanks, Michel, always a pleasure.
COLEMAN MORRIS: Thank you, Michel.
NPR transcripts are created on a rush deadline by Verb8tm, Inc., an NPR contractor, and produced using a proprietary transcription process developed with NPR. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.