Bonus Uproar Shifts Wall Street Pay Practices

It's bonus season on Wall Street, and Washington is poised for outrage.

On Sunday, White House economic adviser Christina Romer said that big bonuses at banks are "ridiculous." And on Monday, White House spokesman Robert Gibbs said, "There are folks who just continue not to get it."

It's reported that Goldman Sachs, Morgan Stanley and JPMorgan Chase combined have set aside $47 billion for bonuses. Why do these big banks pay so much in bonuses when they know they're unpopular with the public?

"The way in which that total number is derived ... is based on a sharing of the profits that the employees generate for shareholders," says Steven Hall, managing director of Steven Hall and Partners, an executive compensation consulting firm.

It's been a "good year on Wall Street," Hall tells NPR host Robert Siegel. But these executive bonuses can be based on smart-thinking by executives as well as economic factors, interest rates and other issues that worked in their favor, Hall says.

Stock Bonuses

Banks are expected to pay more of the bonuses in stock rather than cash this year. Hall says some on Wall Street rely on the cash bonuses for living expenses — to pay for schooling for their children, a second home or other expenses.

"Finding that you're not going to get the cash could be a little bit of a surprise," Hall says. "But I think Wall Street firms have been telegraphing this to their employees for a while — expect a lot more, and in some cases expect all of it in the form of stock that you won't be able to get for three to five years."

Hall says he doesn't think the public's anger and frustration over bonuses would subside if the compensation were reduced by 25 percent or even if it were cut in half.

Wall Street firms often make the argument that they need to pay big bonuses to retain talent.

Some of the biggest bonuses exceed $10 million. Is this a gold-plated labor market where individual bankers can command this much money and walk out the door to work for a competitor if they aren't given their bonus?

"I realize it's not the answer that people want to hear, but the people being paid those kinds of levels of compensation are being paid it because of the production that they've had a hand in generating and the value they've created," Hall says.

An executive could leave and make $30 million across the street, he says.

"It's amazing to think about. It's another world from what most of us are used to dealing with, but these are people who become superstars at what they do," Hall says. "And there are firms that have lists of people that they'd like to go after in the event that they thought that they were recruitable."

The attraction of these superstar bankers is that they can create revenue and profit to benefit shareholders. Still, some on Wall Street, including Morgan Stanley CEO John Mack, won't take any bonus. (The Wall Street Journal says this is the third consecutive year that he hasn't taken a bonus).

Heeding Complaints

Hall says complaints from Washington about executive compensation have made a difference: "It has everybody thinking, 'What's the right thing for our public image? What's the right thing for our employees?' "

Wall Street firms typically pay a smaller salary — perhaps $100,000 or $150,000, and then pay the remainder as a bonus in January. Hall says the concept is designed to be shareholder friendly.

"I don't want to pay you until I know that you really performed and that you really produced," Hall says of the philosophy behind the bonus. "And only then am I willing to step back and write that check or give you cash and stock. The concept of giving equity as part of the compensation program is trying to stretch out that period even longer."

Some of the public anger stems from the idea that big bonuses are being given out after banks were bailed out with money from the government's Troubled Asset Relief Program (TARP). Hall says even though firms didn't use TARP funds to make bonuses, Wall Street banks benefited from borrowing funds from the government for almost nothing and then got a favorable return on their investment.

And Hall says it wasn't necessarily innovation or smart individuals that enabled banks to be profitable in 2009. In some cases, he says, it was "simple arbitrage" by investing in Treasury bills after obtaining funds at low interest rates.

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