« Treating Siblings Equitably: Financial Dilemmas | Main | Reader Question: How Do You Calculate Compound Growth (or Interest)? »
Wall Street Sure Takes Care of Its Own!
By JLP | November 19, 2007
Here’s a question for you:
When Wall Street firms have a bad year, should employees of those firms receive bonuses?
It has been a bad year for shareholders of banks and brokerage firms. Yet, these same firms are going to pay out $38 BILLION in bonuses. According to this Bloomberg.com article, that averages out to an average bonus of $201,500 per person! The article also mentions that aside from Goldman Sachs, every Wall Street firm has lost more than 20% in market value this year. The iShares Dow Jones US Financial Services sector fund, which is composed of 292 financial firms, is down 17.40% so far this year.
So much for pay-for-performance…
November 19th, 2007 at 4:15 pm
But what would their bonuses have been if they WERE performing well?
November 19th, 2007 at 5:28 pm
I gotta say NO, they shouldn’t get a bonus unless their individual performance warrants it. I am sure there are some people in these companies who did not lose money and they probably deserve it. But not anyone else, especially the senior leadership.
November 19th, 2007 at 6:08 pm
While market value may be down, the market value of a company is based on investors’ perception of the value of the company as reflected in current share price, which can be significantly different than the actual value of the company.
In my mind a better measurement of performance is net earnings, sales growth, etc. I suspect that is what the bonuses of the people in question is based on.
And I would suspect that you would want your bonus based on a metric that you had control over, as opposed to market whims. I know I would.
November 19th, 2007 at 6:08 pm
I like the way my DH’s company does bonuses. There are two parts to every employee’s bonus, and both are tied to performance. The first part of the bonus is tied to personal performance - how well they met their goals for the year, how well they scored in their performance review, how well they did in achieving the milestones set before them. That constitutes 2/3 of their bonus. The other 1/3 of the bonus is based on how well their group did in meeting their goals/milestones. The idea is that there is a strong incentive for each employee to perform well as an individual, but there is also an incentive for them to work together as a team and accomplish their goals. If the group fails, but Employee A accomplished all of his/her goals, they would get 2/3 of the maximum alloted bonus (figured as a percentage of annual base salary). If the group performed well, Employee B was a slacker, they only get 1/3 of the bonus. if the group is a bunch of slackers, you don’t get anything.
I think this works well. It sets up good incentives.
November 19th, 2007 at 9:17 pm
Who ever said Wall Street gets pay-for-performance. If a firm didn’t pay big bonuses, the financial professionals would pack up and head to the firm down the street.
Finance is a cut-throat business.
November 20th, 2007 at 12:27 pm
I find it funny, how the usual complaint from the crowd is that the top guys keep all the cookies for themselves. Wall Street is the one industry where the spoils get spread around quite generously and where the workers share in the risk as well. Pay is tied directly to performance - employees are treated more like business partners. And when the performance is not there, people lose their jobs rather quickly. They pay what they have to in order to keep you. I wouldn’t have it any other way.
November 20th, 2007 at 1:56 pm
Miguel,
I’m not against bonuses. I think bonuses are great. However, it doesn’t seem like this year’s performance warrants bonuses.
November 21st, 2007 at 3:29 pm
Interesting to see how the other half lives. I’ve been with the Feds for 28 years. Our Christmas bonus is getting to go home two hours early on Christmas Eve. Oh, well, at least the retirement benefits are good . . .
November 23rd, 2007 at 12:34 pm
@JLP - It really depends on the firm, the dept, the individual’s performance, etc. 2007 has not been a complete bust for everyone, contrary to the picture the press paints. The folks who lost money will feel pain. The folks who made money will be rewarded. Firms are not in the habit of paying money they don’t have to, at least as far as the rank and file are concerned. Probably, the best analogy is professional team sports. The careers tend to be short, tough, and high risk. The cream rises to the top and is famously rewarded for it. Even the rank and file make out pretty good, but that’s because it’s not easy to keep your spot on the team. You’re judged on each and every play, and only as good as your contribution to winning the game. It’s the ultimate meritocracy - which is something that I would think would be celebrated in our American culture, not disparaged the way it is in the media.
@Sam - we all vote with our feet. If making more money was a higher priority to you, over the safety of a govt career and pension, then you would have focused your efforts differently. There are trade-offs to everything. Wall Street employees accept certain trade-offs, which is part of the reason the comp is as high as it is.