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The New York Times agrees with a proposal I've been posting about for months, for example, here and here. The Times suggests that "banks should hold a big chunk of bankers' pay in escrow to be paid out over a long period. Compensation could then be made contingent on the long-term success of each banker's strategies." The only way this could actually happen is if all banks agreed to it. And that won't happen unless the government mandates the idea.
This is a timely discussion because The Washington Post reports today that bankers are expected to earn bonuses of $33.2 billion for 2007 -- just 2% below 2006's record year -- that despite about $100 billion worth of write-downs due to bad loans and a loss of $200 billion in market value for the seven biggest banks.
Not everyone did well. Bonuses were down by as much as 50% to 60% in subprime-mortgage-related departments, while groups such as investment banking took in bonuses that were on average 10% higher than in 2006.
The key to understanding Wall Street pay is to recognize that those bankers expected to make money for their firms next year will bolt to the competition unless they are happy with their pay. It's pretty clear that banks are run for bankers -- not investors. And by getting banking alumni into powerful positions in Washington -- such as Treasury Secretary -- there's little chance that Washington will adopt this escrow proposal.
That's because bankers write big checks to politicians and the politicians don't want those checks tied up in an escrow account. They have power to grab! The result, bankers will get paid big bucks when times are good and others will bail them out when their business goes south.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
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Reader Comments (Page 1 of 1)
3-31-2008 @ 7:31PM
prousa217 said...
Performance bonus is 40% of their write down? Is this what Ivory League schools teach in economics or these aliens CEO change the rules? What is wrong with this picture is what the American people are so mad about! Greed and corruptions, there is no watch -dog or regulations to prevent that is there? Why is Apple so successful? Because of Steve Job, the only CEO who ties his performance in line with Apple's performance instead of Steve Job's performance, that is the difference. We should have the America's richest and America's highest pay performance bonus names on the list with pictures posted daily on the front page of newspaper and front page of Google and all the web pages. .