Big Bank Bonuses Are the Wrong Thing to Worry About
Right now, there is much debate about how much banking executives should or shouldn’t make. Is $1 million too much? Is $500,000 fair? What about bonuses? One of the big concerns is that Washington will end up structuring compensation packages at banks (along with shareholder dividends and interest rates). Socialized banking here we come?
But these are the wrong kinds of things to be worrying about. It’s not about the decay of capitalist principles. It’s not about banking execs living the high life.
It’s about who is getting the big bucks, not how much. It’s also about principles like merit and accountability. That’s why people are so huffy about big bank bonuses this year — because they are being paid to the same people who screwed the financial industry up in the first place.
Reality Check: If a bank gets TARP money, it is probably screwed up somehow. People who screw up, or people who run screwed-up banks, shouldn’t get bonuses.
Win = bonus. Fail = no bonus. Right? The American Way? Getting paid a salary is one thing, even a handsome one. But earning anything above and beyond should be based on merit.
Financial institutions complain about how the government’s restrictions on compensation will affect their ability to “attract and retain top talent.” Attracting top talent is certainly a major concern; the industry needs the brightest and most capable leaders to get through this. But retaining talent?? Most of America (e.g., bank shareholders) is haggling over how much bankers should/shouldn’t make when many bankers probably shouldn’t even have jobs at all.
Bottom Line: You can’t attract qualified executives when the compensation is capped at $500,000. No one will get the job done for that amount. Especially not the current guy.
Reality Check: Thinking the same people who got us into this mess can get us out is like thinking more debt will fix our credit crisis.
The U.S. is (1) giving away money it doesn’t have (2) to the same bankers who created the problem so (3) banks can lend it (4) to people who don’t qualify so they can, in turn, (5) buy crap they don’t need and can’t afford. And we expect a different result?
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I understand your point regarding socialization of banks. However, what’s happening here is nothing more than tying covenants to the TARP money, which I believe is the right thing to do within reason. I acquired a large construction company using approx. 50% debt funding. In my loan docs were covenants restricting my salary and those of company leadership, bonuses and dividends. This is common practice in banking from the lending side – why shouldn’t it be common practice when the lender is accepting taxpayer money?
In my opinion, troubled banks should absolutely have covenants tied to their TARP money. Do investments in jets, stadium naming rights, million dollar office renovations and massive bonuses seem appropriate – or justified – in ANY failing business? These covenants are a necessary restriction to try and safeguard us from those who are and will continue to make poor and selfish decisions.
I completely agree that salary caps aren’t the primary “ball” we should be watching, but it’s an absolutely necessity to put clear and finite restrictions on such things as to prevent abuse. On the flip side, there are financial institutions who aren’t necessarily “troubled” who have applied and accepted TARP money. But my reasoning still stands. Find me a bank that doesn’t put performance covenants and restrictions in their loan packages and you’ll have a bank that doesn’t do smart business.
These controls are necessary and I applaud the government. I only wish they would have thought of the same restrictions and applied them to Detroit… Maybe then they would have thought to fly commercial to DC.
This is exactly what happens when you sign up for any government plan. It is part of the package. And the pendulum swings from one end to the other as you point out.
Let’s face it, how many lemmings did you see stop at the edge of the cliff and NOT jump? If any of them stopped they sure weren’t noticeable. Much of the past few years was a real uncontrolled growth, herd-like mentality. There is much still to unwind in order to get it together again and that takes time.
These big bonuses, stupidly extravagent parties, etc. are terrible PR moves…but in America, we should have the freedom to make bad business decisions. BUT…and this is a Kim Kardashian BIG BUT…we should also have to deal with the consequences of those actions. TARP violated this principle. Capping executive pay only further violates this principle.
Scott, you ask if “investments in jets, stadium naming rights, million dollar office renovations and massive bonuses seem appropriate – or justified – in ANY failing business?” I’ve always wondered whether these were appropriate for any business period — even those in perfect health, much less a failing business.
FYI – Obama’s Phase II of TARP includes $248 million for office furniture. At least that’s what FOX News was reporting yesterday.
I don’t care how much we pay the right person… as long as they are the right person.
The cap is a great example of Obama pandering to the public.
The question that needs to be answered — and isn’t getting addressed — is: WHO should be fixing the problem?
If the answer is “someone from outside the industry”, then the cap is ridiculous — anybody who can, and does, help fix the problem should be compensated far more than $500k.
If the answer is “no one from outside the industry”, then the cap is simply pandering to the public who whines and cries about anyone that makes a lot of money and isn’t an entertainer or athlete.
Really funny Jeffry
I just posted something of a similar sentiment as it’s making me quite angry we’re focusing on the wrong things – e.g. publicly punish everyone who ever worked for a bank – rather than the right things – e.g. find the solutions to this crisis and move one whilst punishing the management who messed up.
Great minds think alike?
Chris