Bonus Season Brings Political Risks For Banks

Goldman Sachs Chief Executive Officer Lloyd C. Blankfein i i

Goldman Sachs CEO Lloyd C. Blankfein (left) and JPMorgan Chase CEO James Dimon are among the top executives who will be awarding substantial bonuses to employees for job performance in 2009. Manuel Balce Ceneta/AP hide caption

itoggle caption Manuel Balce Ceneta/AP
Goldman Sachs Chief Executive Officer Lloyd C. Blankfein

Goldman Sachs CEO Lloyd C. Blankfein (left) and JPMorgan Chase CEO James Dimon are among the top executives who will be awarding substantial bonuses to employees for job performance in 2009.

Manuel Balce Ceneta/AP

Over the next few weeks, the country's biggest banks will tell investors how much they earned last year and how much they're handing out in executive bonuses.

For the banks, the issue is fraught with political risks. The bonuses are expected to be sizable — further inflaming a public already infuriated over last year's bank bailout.

Federal and state laws actually give regulators relatively little authority over how much bankers are paid. But that's changing as bank regulators search for ways to clamp down on bonuses.

"The public is so mad about the compensation issue that every player out there wants to show they understand that public anger, so they're all pushing forward," says Douglas Elliott, a fellow at the Brookings Institution.

Elliott notes that Congress, the Federal Reserve and the White House are all talking about ways to rein in bankers' bonuses. On Monday, the Federal Deposit Insurance Corp., which regulates many of the nation's banks, proposed raising insurance premiums on banks whose compensation practices encourage risky behavior.

Elliott says a lot of banks will tie an employee's bonuses to the amount of money he or she earned that year. And that gives employees incentive to take short-term gambles even if they suspect the strategy may lead to big problems down the road.

"If you're a trader, all you have to do is have nine good years, make a lot of money, and then if you get no bonus in the 10th year, it's not that big a deal," Elliott says.

But compensation consultant Alan Johnson is less than impressed with the FDIC's proposal.

"That is about the silliest idea imaginable that an untrained regulator with 8,000 banks is going to be able to go out and assess the risk of compensation programs — no experience whatever," Johnson says.

He adds that it's difficult to figure out whether a specific compensation plan encourages risk.

For their part, big banks say they are reforming their compensation plans. For one thing, they're paying more of their bonuses in stock — not in cash. And they're requiring employees to hold onto the stock for longer periods. They hope traders and bankers will take fewer risks if their personal wealth is tied to their employers' long-term health.

Speaking as a former banker, Elliott says: "We may be stupid, but we're not that stupid. The crisis really was very bad for the industry and the people in it. And collectively, there has been a lot learned, and that is being reflected in behavior now."

But with Wall Street profits growing again, banks are also under growing pressure to hire the best employees, and they're doing that by offering bigger and bigger bonuses.

One bank official noted that some banks are once again offering guaranteed bonuses. They're promising prospective hires that they'll get their bonus no matter what happens — even if the person ends up losing the bank's money.

That kind of lavish promise ups the ante for the industry as a whole. The same official said banks are also facing growing competition from overseas financial institutions for the best talent.

Jay Brown, a professor at the University of Denver law school, says that makes it much harder for banks to consider reining in their compensation.

"It's tough to be the one financial institution out there that pays reasonable compensation when everybody else is paying excessive compensation, or at least compensation that looks excessive," Brown says. "There needs to be somebody that says, 'All of you must be more reasonable about this.' "

Federal and state regulators are competing to fill that role. And the big bonuses expected to be announced over the next few weeks will only give them new ammunition to do so.

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