2
Wall Street bonuses fall
Dozens of activists, including the unemployed and those living in foreclosed homes, demonstrated outside of the New York Stock exchange against Wall Street bonuses on December 15, 2010 in New York City. Financial institutions may be giving the second largest payout in bonuses in the history of Wall Street. Last year Wall Street paid out a reported $20.3 billion in bonuses.
To view this content, Javascript must be enabled and Adobe Flash Player must be installed.
Kai Ryssdal: We celebrate the bounty this week. That's what the big meal Thursday's supposed to be about, right? Yeah, kind of depends. Those who work on Wall Street will have slightly less bounty this year. Still ample, but less. Estimates are year-end bonuses will be down as much as 30 percent when all said and done.
Our series Economy 4.0 is all about how to make the financial system work better for more people, not just the 1 percent.
Marketplace's David Brancaccio is here to talk shrinking bonuses. Hey David.
David Brancaccio: Hey there.
Ryssdal: All right, so this is breaking my heart -- bonuses on Wall Street going down -- come on.
Brancaccio: Yeah, the average bonus last year was $130,000. This time around, just a simple $100,000 on average -- that'll be for the stock guys. People in bonds, the bonus could be down even more.
Ryssdal: I mean, why? Is there something physically happening?
Brancaccio: Market conditions, right? They're not making big profits eventually trickles down to your bonus -- it turns out. But the other thing is this big regulatory process -- that's a big word for: Washington is trying to clamp down. 'Cause remember in back in 2008 what happened? Right as the bailout is being deployed, it turns out that Wall Street is giving itself $18 billion in bonuses.
Ryssdal: Washington is having its own issues nowadays but what are they doing about bonuses? How are they cracking down? Tell me how it's working.
Brancaccio: It's not supposed to be this big punishment for some people getting paid a lot of money. It's supposed to be about rethinking compensation so that traders don't have this huge incentive to take big risks that might pay off, but also could go bad -- destroying the economy and causing bailouts. Now the typical way of thinking about this -- right? -- is tie compensation, tie bonuses to stock prices. That'll keep them disciplined. Listen to what Martin Baily of Brookings said.
Martin Baily: A lot of people are so used to the idea that you want to aline the incentives of the managers with the incentives of the shareholders that they can't think about the fact that really that's not quite right for the financial sector.
Brancaccio: So you get -- like -- the shareholders, they might like the risk-taking. It's just that if the risk-taking goes bad, you and me -- society suffers.
Ryssdal: Well, which brings me to the thing you said a minute ago before the piece of tape: this idea of punishment. I would venture that if we go out -- outside the studios -- and asked 10 people what we should do about bonuses on Wall Street, they would say, "We ought to make them pay us. We ought to punish them for what they've done to the economy." How do we square that with what's going on actually in the regulatory process?
Brancaccio: Exactly. And how do we square the fact that they're still working on these rules in Washington all these years later, right?
Ryssdal: Right.
Brancaccio: No, they're not thinking about that at all. What they are thinking about is something a little bit more practical. It has to do with: Please disclose what your bonuses and your compensation is -- always nice. And the other thing they're working on is deferring compensations -- maybe the guy and the women don't get their bonuses right away, but it comes in two years, three years and if their bets don't go bad, they can keep all their money.
Ryssdal: This is kind of an extraordinary conversation to be having when unemployment is at 9 percent and we're still down 8 million jobs and yet Wall Street and the financial sector are talking $100,000 bonuses.
Brancaccio: And it's amazing how tough it is to do anything about this. Listen to Charles Elson, director of the Weinberg Center for Corporate Governance, about what happens if bonuses are shoved down one way or another.
Charles Elson: We've seen the base pay go up as a way around the limitation on the bonus. And that's not so good either. Do you really want to guarantee a large hefty salary for someone who you think is really not done the greatest job? Anytime the government inserts itself into the pay process, bad things happen.
Ryssdal: I love how he did that little chuckle right where he said, "not done the greatest job."
Brancaccio: And it's really cool that if you work in banking, you're so cleaver with money that can always figure out a way to get yourself paid.
Ryssdal: All right, before we wrap it up, let me ask you one question -- actually it's just three words. You ready?
Brancaccio: Yeah?
Ryssdal: Occupy Wall Street?
Brancaccio: Well, what that does is it keeps pressure -- in theory -- on the people with their regulatory plans in Washington. It means, "The whole world is watching. What's the plan Washington?" That's the question coming from Occupy Wall Street.
Ryssdal: What's the plan? Indeed. David Brancaccio and our series Economy 4.0. Thank you David.
Brancaccio: You bet.
There are added problems that weren't discussed, namely that in publicly traded companies, such as Goldman Sachs, no matter how much malfeasance they commit, if the company survives without impunity, investor money flows in to continue to prop them up. Goldman Sachs could disclose the obscene bonus structures they payout tomorrow, but that will not stop them from reaping the reward from the public shareholders' money. But, if a company like Goldman actually faces, say, a sort of "death penalty" for committing public malfeasance through its officers, suddenly investor money might go elsewhere because they don't want to risk losing it. This would also give boards added incentive to actually govern and pick good candidates for management.
But, above all else, I would like us all to ask the question: is what Wall Street does worth that much? In terms of advancing the good of society, whether through creating businesses or advancing technology, does Wall Street actually do that anymore? How much of a dollar invested actually arrives to the business that needs it once it goes through the Wall Street machine?
Greetings,
Congratulations this segment made me sign up so I could leave a comment! I'm a recent Business Administration graduate, and a long time listener of the podcast. This story reminded me of an important discussion we had in management class. Namely the research done on the effectiveness of bonuses; what they do, how they affect performance ect.
Namely, that bonuses are proven to be effective in repetitive manual labor (worker A gets a bonus for a number of widgets made in a month) and ineffective almost everywhere else. Not just ineffective, but usually having a noticeably negative influence on decision making and creative reasoning. It’s my understanding that this is a long standing position of psychologists going back several decades.
Am I wrong in thinking that this is great news that the average bonus is decreasing? That we might see better decisions in general from bankers, and lets include the rest of the financial system, if their reasoning and decision making ability is not hampered this way?
