Wall Street Bonuses

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Vikram Parsani

See also Executive Compensation.

The term Wall Street bonuses is generally used to describe the year-end cash bonuses paid to New York City bankers, brokers and traders in December and January.

Calculation

Firms on Wall Street tend to pay bonuses based on a combination of individual, unit and institutional performance. These bonuses usually represent 60% to 80% of an employee's take-home pay. For example, a Director in a Wall Street firm may have a base salary of $200,000 to $300,000, but make another $2.0 million to $10.0 million in year-end bonuses, a portion of which may be in company stock. In general, Wall Street firms pay the highest bonuses to their most successful revenue generators, often referred to as rainmakers.

History

A report issued on 28 January 2009 by the Office of the New York State Comptroller indicated that Wall Street bonuses totaled $18.4 billion in 2008, down 44.1% from $32.9 billion in 2007.^[1] Although this reduction marks the largest absolute and percentage decline in more than 30 years, the 2008 bonus pool of $18.4 billion is still the sixth largest on record.^[1] The report also indicated that an average Wall Street bonus amounted to $112,020 in 2008, down 36.7% from $177,010 in 2007.^[1] While the 2008 pool pales in comparison to bonuses paid in 2005, 2006 and 2007, it is comparable to the 2004 pool of $18.6 billion, paid at a time when the Dow Jones Industrial Average was well above 10,000 points and on its way to a record high.^[2]

Total Wall Street Bonuses from 1985 to 2008, Office of the New York State Comptroller

Annual Changes in Total Wall Street Bonuses from 1985 to 2008, Office of the New York State Comptroller

Criticisms

On 29 January 2009, President Barack Obama refered to the 2008 bonus pool of $18.4 billion as "shameful" and "the height of irresponsibility".^[3] A year ago, there were seven major firms in New York City, namely Bear Sterns, Citigroup, Goldman Sachs, J P Morgan Chase, Lehman Brothers, Merrill Lynch and Morgan Stanley.^[1] Since then, two have been acquired (Bear Sterns and Merrill Lynch), one failed (Lehman Brothers) and two have converted from independent investment banks to bank holding companies (Goldman Sachs and Morgan Stanley).^[1] The remaining firms received sizable cash infusions from the Federal Government's Troubled Assets Relief Program (TARP) even as their mortgage-related losses increased to $55 billion, losses in shareholder value reached $200 billion and employment in New York City's securities industry fell 10.2% from 187,800 in October 2007 to 168,600 in December 2008.^[4]

In an interview, Nassim Nicholas Taleb argued that "the current system of asymmetric compensation, in which people are rewarded when they do well and aren’t required to return the rewards when they lose money, is detrimental to society and needs to change".^[5] Amid numerous reports of Wall Street excess, such as the $1.2 million that former Merrill Lynch CEO John Thain spent to redecorate his office last year or the $50.0 million business jet that Citigroup (C) had on order until the Treasury stepped in, some shareholders have argued that a fundamental overhaul of Wall Street bonuses is necessary and have called for measure like clawbacks and deferred bonuses.^[3] Given that taxpayers have also invested billions of dollars via the TARP to stabilize a number of Wall Street firms, many have argued for greater transparency and accountability in the use of these funds.^[2]

Legislation

On 19 March 2009, the House of Representatives voted 328-93 in favor of imposing a 90% tax on bonuses paid to employees with family incomes above $250,000 at AIG and other companies that received at least $5.0 billion in federal bailout funds via programs like the TARP.^[6] If approved by the Senate, the Compensation Fairness Act of 2009 would apply to all bonuses issued since 31 December 2008.^[7] The vote itself came in the midst of massive outrage surrounding approximately $165 million in bonuses paid to AIG employees, including those at the company's Financial Products unit whose misplaced bets on credit default swaps and other collateralized debt obligations almost caused AIG's collapse. Till date, AIG has received $182.5 billion in federal bailout money and is now 80% government owned.^[6]

See the Senate proposal on the Compensation Fairness Act of 2009 here.

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4} Wall Street Bonuses Fell 44% in 2008, Office of the New York State Comptroller
2. ↑ ^{2.0 2.1} What Red Ink? Wall Street Paid Hefty Bonuses, The New York Times
3. ↑ ^{3.0 3.1} Obama Blasts Wall Street Bonuses, BusinessWeek
4. ↑ The Bonuses Keep Coming, The Washington Post
5. ↑ Wall Street Bonuses May Go Way Of Dodo Amid Bailouts, Bloomberg
6. ↑ ^{6.0 6.1} House Passes Bill Taxing Fat AIG And Other Bonuses, BusinessWeek
7. ↑ Bonus Tax Heads To Senate After House Passes 90% Levy, Bloomberg