The Contrarian

Jason Snyder

Jason Snyder
New York, New York,
October 31
Jason Snyder is a graduate of Queens College-CUNY (B.A. Political Science) and Harvard Law School and has practiced corporate, securities and finance law on Wall Street, in Silicon Valley and in London, representing investment banks, commercial banks, and startup technology companies. He currently works as a commercial/securities litigator for a firm in Manhattan.


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OCTOBER 29, 2008 1:06AM

How Big Will YOUR Bonus Be This Year?

Rate: 5 Flag

As we approach the traditional time of the year when Wall Streeters start salivating like Pavlov's dogs over their year-end bonanzas, surely this year there will be many going home empty-handed.  Or maybe not.  At least not those still employed.  Bloomberg reported yesterday that Wall Street firms have been setting aside money for year end bonuses, and the numbers don't reflect the hemorrhaging of cash at the major financial institutions.

Merrill Lynch has set aside $6.7 billion for bonuses this year (an average of $110,049 per employee -- of course that's an average; some earn MUCH more, others much less), compared to $6.9 billion last year.  In fact, because Merrill laid off so many people this year, it has actually set aside more money per employee in bonuses than it did last year (even though the total bonus pool didn't increase).  In the intervening year, of course, Merrill has lost money every single quarter and has seen its stock price slide 70%.  And had it not been for its acquisition by Bank of America, it may have been doomed to the same fate as Lehman Brothers.

Goldman Sachs and Morgan Stanley will both earn a profit this year, but much lower than last year.  But Goldman's profits dropped 47% this past year and its stock price is down 53%.  For Morgan, earnings are down 41% while the stock has lost 69%.  Both have reduced their bonus pools accordingly, but are still setting aside a shocking amount of money -- $6.85 billion for Goldman (an average of $210,322 per employee; down from $339,408 per employee last year and a total bonus pool of $10.15 billion) and $6.7 billion for Morgan Stanley (an average of $138,749 per employee; down from $168,067 per employee last year and a total bonus pool of $8.02 billion)

Even Lehman Brothers Holdings, after having filed the largest bankruptcy filing in US history, will pay bonuses to some of its employees.

Now, let's get some things out of the way.  First of all, many of the employees at these institutions have just been doing their job and have not been responsible for the financial crisis, so they should not necessarily be punished for the misdeeds of others, especially if their division or group was profitable.

Second of all, companies need to reward their producers so they don't lose them.  Even (especially?) in a tumultuous market, big producers have great job prospects.  This is why I think the average numbers are misleading and you will see the big producers get huge bonuses -- maybe even bigger than the last few years -- while a large number of workers will get nothing, or a token bonus.

But there is undoubtedly something distasteful about Wall St. handing out gobs of cash at a time when the country is just starting to grapple with the new reality caused by the irresponsibility (or worse) of these very same firms.  It becomes unfathomable when these institutions have all just accepted billions of dollars ($125 billion in aggregate) of taxpayer money from the federal government.  And that is why Representative Henry Waxman has been holding hearings and why he sent letters on Tuesday to the nine mega-banks asking them to explain why they are setting aside these large sums for bonuses at the same time they are taking money in a bailout.

As Waxman wrote, “According to one analyst, ‘Had it not been for the government’s help in refinancing their debt, they may not have had the cash to pay bonuses.’”


What is truly remarkable though, is that you hear hardly a peep out of shareholders.  And that is mainly because they are powerless.  Shareholder can vote with their wallets --i.e. sell their shares -- but not much else.  Even though shareholders own the corporation, the laws and rules are written to make it extremely difficult for any shareholders to have a real say in the company.  The game is rigged in favor of management over the shareholders' interests, and that is why American companies are often run poorly these days and with such short-term vision.  We need to align the interests of shareholders and managers, and revamp our corporate governance system to reflect best practices.

What many people have tended to misunderstand over the last few decades is that our regulatory system is not holding our economy back, our regulatory system is the reason we have been so successful.    It is the reason people have flocked to the US stock market; because they thought they could trust the rules of the game.  It is the reason why even today, in the midst of this crisis, the US dollar is rising fast, because our system is considered fundamentally trustworthy and safe.  We need to enhance our regulation of the market so that investors can trust it, and they will come back.

Let me be clear -- I generally think it is a bad idea for the government to set a limit on executive compensation.  Government has a role to play, perhaps by taxing the corporation for compensation above a certain level or other types of nudging of private enterprise in the right direction, but should not set ceilings on pay.  That is a matter for the shareholders, management and the board of directors.  When the government is giving lump sums of cash to companies though, the rules have changed.  In that case, the government has a fiduciary duty to the American taxpayer to make sure it uses its influence to institute sensible and responsible policies and safeguard the taxpayers' investment.

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I'm peeping and will peep some more. Why give bonuses to people who would have lost their jobs had their companies not been saved. Once the money the taxpayers gave for the bail out is earned and returned then maybe a bonus is acceptable.

Many state employees in Florida got 3% bonuses/raises last year if they got a bonus or raise at all no matter how stellar their performance.

The employees of companie that take government money for the bailout should now live in the world of other government employees.

Peep. Peep. Peep.
I believe the bailout dollars should only be used for essential company functions and restoring credit. Can't they suspend bonuses or minimize them to frozen turkeys or something until the companies get back on their feet and pay us back?
To play devil's advocate for a moment buckeyedoc, the counter-argument would go something like this: if the banks do not pay ANY bonuses, they will lose their top producers to hedge funds, private equity funds, or even smaller investment banks that are not taking bailout money. Once they have lost those producers, the banks' performance will be even more dismal, making it much harder for them to get back on their feet and repay the taxpayers. Because all the major banks have now taken government money, there should be no worry of losing producers to other top banks (because of bonuses) but there are still many financial institutions in this country that are not under the thumb of Treasury.

It's a compelling argument, but I'm still not sure I buy it.

I think one place Treasury has really dropped the ball is in requiring the banks to lend the money they receive from Treasury. The UK made this a requirement of their bailout, and today the White House put out a statement trying to cajole the banks into lending, but thus far our policy makers have shown an unwillingness to use their leverage to impose real restrictions, or exert real influence, on financial institutions.
For the record, I'm not sure I agree with the subhead for this post, written by the OpenSalon editors for the home page. I don't think I ever argue that the bonuses being paid this year are "not necessarily a bad thing." It may be necessary for the survival of some of these firms, and I may not want the government to begin imposing wage restrictions on firms (especially those that don't take any government money), but I think the scale of the bonuses being discussed is nauseating considering what is going on the world right now. And I think shareholders should be incensed at what will likely be a waste of much of their money.