This thing about banking bonuses is really starting to bug me
My boyfriend works in the financial sector. I won't go into much detail about the specifics, because, of course, it's a really bad idea to write anything about that sort of thing online.
But this hoopla about bonuses is really starting to bug me.
To put this in context, the specific company he works for is not in any kind of financial straits, has not received any bailout money or been taken over by anyone (it's both UK-and US-based and this applies to both branches). And he, specifically, is not making one of those obscene salaries you read about.
But here's the thing that's bugging me.
People on both sides of the pond are legitimately griping about huge bonuses being paid to people in the financial sector in general, and specifically to the companies on the receiving end of bailouts. Politicians are hopping on the bandwagons and attempting to cater to the mobs by shouting about how all bonuses in the financial sector should be banned, across the board. It's a cheap and easy general statement that has mass appeal. It's a safe and popular thing to say.
But there are two things about this that bother me. The first is that they are pandering to people who resent the salaries that people in the financial sector make, period. In times in which there has been no recession--oops, sorry, no CREDIT CRUNCH (it's a totally different thing if you use a different word)--there is still an outraged article in the more conservative newspapers every year about how obscene it is that people make that much money. And every year, I want to smack somebody around and say, "Look, that's how much the jobs PAY. Get over it."
There are lots of reasons that people get paid that much money for what they do. They deal with literally billions of dollars, and if they screw something up, they lose billions of dollars, as the current financial crisis should show us. You want people in those positions who don't screw it up. Ever.
You want this kind of talent and reliability right down to the people who program your computers. They can't afford to have anybody who isn't at the top of their game working on their computer systems. If you want people who are the best at what they do and have the most experience, then you have to pay the top end of the market salaries. That's how it works. People don't get into those positions by watching the clock and leaving at 5 pm, and they don't get into those positions by being mediocre. They have earned and continue to earn those wages by working hard and becoming the best at what they do. So, in general, they get paid more than your average typist, and everyone just needs to get over it.
However, right now, we're in the middle of financial meltdown. And a lot of these companies are being bailed out. So somebody has screwed up. Lots of people are out of work, and the idea that the people who had a big part in putting us into this situation are pulling down huge salaries while we're out of work is repellent.
However, saying that all bonuses in the financial sector or even in a bailed-out company should be pulled may make you popular, but it's not wise.
Sound heretical?
Here's the thing. Let's look at a sentence in this article about AIG:
http://news.yahoo.com/s/ap/20090318/ap_on_go_co/aig_outrage
"The retention payments — ranging from $1,000 to nearly $6.5 million — were put together in early 2008, long before then-Treasury Secretary Henry Paulson asked Liddy to take over the company."
Okay, so I don't know much about AIG, but let's look at those bonus figures and what they mean. A $6.5 million bonus is going to someone at CEO level or similar. A $1,000 bonus is going to some guy REALLY far down the totem pole. It's probably fairly safe to assume that these bonuses represent nearly every person in the company. So if no bonuses are paid, this means no bonuses to anyone.
I have no idea what the company structure is like at AIG, and I have no idea what their specific compensation schemes are. But a fairly typical situation is like this:
The Acme Company has several different divisions. Acme also has an annual bonus scheme. At the end of the fiscal year, all employees receive a bonus as part of their compensation. 50% of this bonus is based on the employee's performance, and 50% of this bonus is based on how well the company is doing. This bonus can be up to 15% of your annual salary.
When an employee takes on a position, they take into account that employee performance bonus. It's basically part of their salary, but it's entirely up to them whether or not they receive it. If you do a great job, you get that extra 7.5%. Financial institutions work around the clock, and most employees are salaried (ie do not get paid overtime), so if they get a phone call at 2 am, that's the breaks. But the guy who is willing to get out of bed and answer the phone at 2 am knows that this extra effort will be remembered and rewarded when his performance-based bonus is calculated.
So, let's say that Acme lost money last year, due to the utter stupidity of its management as a whole. However, all of these losses are due to the abysmal failure of the Acme Explosives division. Acme Instant Tunnels, however, made record profits due to the hard work of all of its employees, but it's a smaller division, and its total profits couldn't make up for the financial black hole that was Acme Explosives.
So what happens to the bonus scheme? I think everyone can agree that the management of Acme Explosives should be denied bonuses if not sacked. But what about the management of Acme Tunnels? What about the IT support guy for Acme Explosives who got calls every night at 2 am and always answered them and fixed the problems?
Under normal, non-bailout circumstances, what would happen is that the 50% of the bonus that is calculated off of how well the company is doing would just plain be cut out for everyone, including the management of the profitable Tunnels division. Theoretically, the hard-working IT guy would get his 50% performance-based bonus, and the people responsible for the abysmal performance of the company would get no bonus at all.
In practice, though, what IS happening is that nobody is getting bonuses EXCEPT the guys at the top who were responsible for taking a big poo on the company's profits. Why? Because they're the guys who get to calculate out who gets a bonus, and they're certainly not going to cut their own. They HAVE no boss; they ARE the bosses.
What IS happening is that top management in companies that are doing just fine are using the current economy as an excuse to cut out the bonuses to the "little guys" in the company, and are pocketing the extra cash themselves.
So, now that we, as taxpayers, are giving these companies money, we're saying that we are these bosses' bosses, and we've decided that they've all done a bad job, and so nobody gets bonuses.
Fair enough, to a certain extent. But this is a lot like going to a failing restaurant, getting really terrible food, but having a fantastic server, and leaving no tip. The only one who really ends up getting shafted is the one person who was doing his/her job.
Every time I hear Gordon Brown (or anyone else) talk about banning all of the bonuses in the financial sector, across the board (including within successful companies), full stop, it makes me angry. Nice soundbite, Gordy, but what about the companies that are doing really well right now? SURELY they should be allowed to reward their employees for this success, ESPECIALLY now? (Now we're not only leaving no tip, we're banning tips at all restaurants, everywhere.)
And what about the ones who aren't succeeding? In the failing economy we need, more than ever, to have the very best people in every position in every one of those failing companies. Don't get me wrong--there ARE people there who are responsible for the messes, and their pay packets should reflect this. Perhaps these packets should contain little pink slips.
But when I read that article about AIG, I can't help but see those two numbers: $6.5 million and $1,000. If a company is receiving public funds as part of a bailout, yeah, I'm with everyone else, and can't really think of a way anyone could justify a $6.5 million bonus, no matter how it's sliced.
But that $1,000. I don't know. That's not a CEO bonus, that's for dead certain. That size of a bonus is not going to someone who is making decisions that lead to financial meltdown. It could be the guy who cleans the offices at night and has really gone the extra mile this last year. I know that AIG is getting bailed out, and that changes things, but I just can't say that I'd deny that bonus without knowing all of the facts.
My boyfriend works in the financial sector. I won't go into much detail about the specifics, because, of course, it's a really bad idea to write anything about that sort of thing online.
But this hoopla about bonuses is really starting to bug me.
To put this in context, the specific company he works for is not in any kind of financial straits, has not received any bailout money or been taken over by anyone (it's both UK-and US-based and this applies to both branches). And he, specifically, is not making one of those obscene salaries you read about.
But here's the thing that's bugging me.
People on both sides of the pond are legitimately griping about huge bonuses being paid to people in the financial sector in general, and specifically to the companies on the receiving end of bailouts. Politicians are hopping on the bandwagons and attempting to cater to the mobs by shouting about how all bonuses in the financial sector should be banned, across the board. It's a cheap and easy general statement that has mass appeal. It's a safe and popular thing to say.
But there are two things about this that bother me. The first is that they are pandering to people who resent the salaries that people in the financial sector make, period. In times in which there has been no recession--oops, sorry, no CREDIT CRUNCH (it's a totally different thing if you use a different word)--there is still an outraged article in the more conservative newspapers every year about how obscene it is that people make that much money. And every year, I want to smack somebody around and say, "Look, that's how much the jobs PAY. Get over it."
There are lots of reasons that people get paid that much money for what they do. They deal with literally billions of dollars, and if they screw something up, they lose billions of dollars, as the current financial crisis should show us. You want people in those positions who don't screw it up. Ever.
You want this kind of talent and reliability right down to the people who program your computers. They can't afford to have anybody who isn't at the top of their game working on their computer systems. If you want people who are the best at what they do and have the most experience, then you have to pay the top end of the market salaries. That's how it works. People don't get into those positions by watching the clock and leaving at 5 pm, and they don't get into those positions by being mediocre. They have earned and continue to earn those wages by working hard and becoming the best at what they do. So, in general, they get paid more than your average typist, and everyone just needs to get over it.
However, right now, we're in the middle of financial meltdown. And a lot of these companies are being bailed out. So somebody has screwed up. Lots of people are out of work, and the idea that the people who had a big part in putting us into this situation are pulling down huge salaries while we're out of work is repellent.
However, saying that all bonuses in the financial sector or even in a bailed-out company should be pulled may make you popular, but it's not wise.
Sound heretical?
Here's the thing. Let's look at a sentence in this article about AIG:
http://news.yahoo.com/s/ap/20090318/ap_on_go_co/aig_outrage
"The retention payments — ranging from $1,000 to nearly $6.5 million — were put together in early 2008, long before then-Treasury Secretary Henry Paulson asked Liddy to take over the company."
Okay, so I don't know much about AIG, but let's look at those bonus figures and what they mean. A $6.5 million bonus is going to someone at CEO level or similar. A $1,000 bonus is going to some guy REALLY far down the totem pole. It's probably fairly safe to assume that these bonuses represent nearly every person in the company. So if no bonuses are paid, this means no bonuses to anyone.
I have no idea what the company structure is like at AIG, and I have no idea what their specific compensation schemes are. But a fairly typical situation is like this:
The Acme Company has several different divisions. Acme also has an annual bonus scheme. At the end of the fiscal year, all employees receive a bonus as part of their compensation. 50% of this bonus is based on the employee's performance, and 50% of this bonus is based on how well the company is doing. This bonus can be up to 15% of your annual salary.
When an employee takes on a position, they take into account that employee performance bonus. It's basically part of their salary, but it's entirely up to them whether or not they receive it. If you do a great job, you get that extra 7.5%. Financial institutions work around the clock, and most employees are salaried (ie do not get paid overtime), so if they get a phone call at 2 am, that's the breaks. But the guy who is willing to get out of bed and answer the phone at 2 am knows that this extra effort will be remembered and rewarded when his performance-based bonus is calculated.
So, let's say that Acme lost money last year, due to the utter stupidity of its management as a whole. However, all of these losses are due to the abysmal failure of the Acme Explosives division. Acme Instant Tunnels, however, made record profits due to the hard work of all of its employees, but it's a smaller division, and its total profits couldn't make up for the financial black hole that was Acme Explosives.
So what happens to the bonus scheme? I think everyone can agree that the management of Acme Explosives should be denied bonuses if not sacked. But what about the management of Acme Tunnels? What about the IT support guy for Acme Explosives who got calls every night at 2 am and always answered them and fixed the problems?
Under normal, non-bailout circumstances, what would happen is that the 50% of the bonus that is calculated off of how well the company is doing would just plain be cut out for everyone, including the management of the profitable Tunnels division. Theoretically, the hard-working IT guy would get his 50% performance-based bonus, and the people responsible for the abysmal performance of the company would get no bonus at all.
In practice, though, what IS happening is that nobody is getting bonuses EXCEPT the guys at the top who were responsible for taking a big poo on the company's profits. Why? Because they're the guys who get to calculate out who gets a bonus, and they're certainly not going to cut their own. They HAVE no boss; they ARE the bosses.
What IS happening is that top management in companies that are doing just fine are using the current economy as an excuse to cut out the bonuses to the "little guys" in the company, and are pocketing the extra cash themselves.
So, now that we, as taxpayers, are giving these companies money, we're saying that we are these bosses' bosses, and we've decided that they've all done a bad job, and so nobody gets bonuses.
Fair enough, to a certain extent. But this is a lot like going to a failing restaurant, getting really terrible food, but having a fantastic server, and leaving no tip. The only one who really ends up getting shafted is the one person who was doing his/her job.
Every time I hear Gordon Brown (or anyone else) talk about banning all of the bonuses in the financial sector, across the board (including within successful companies), full stop, it makes me angry. Nice soundbite, Gordy, but what about the companies that are doing really well right now? SURELY they should be allowed to reward their employees for this success, ESPECIALLY now? (Now we're not only leaving no tip, we're banning tips at all restaurants, everywhere.)
And what about the ones who aren't succeeding? In the failing economy we need, more than ever, to have the very best people in every position in every one of those failing companies. Don't get me wrong--there ARE people there who are responsible for the messes, and their pay packets should reflect this. Perhaps these packets should contain little pink slips.
But when I read that article about AIG, I can't help but see those two numbers: $6.5 million and $1,000. If a company is receiving public funds as part of a bailout, yeah, I'm with everyone else, and can't really think of a way anyone could justify a $6.5 million bonus, no matter how it's sliced.
But that $1,000. I don't know. That's not a CEO bonus, that's for dead certain. That size of a bonus is not going to someone who is making decisions that lead to financial meltdown. It could be the guy who cleans the offices at night and has really gone the extra mile this last year. I know that AIG is getting bailed out, and that changes things, but I just can't say that I'd deny that bonus without knowing all of the facts.
posted by Simone @ 6:58 PM
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