Banker’s Response: Should We Get Bonuses?

November 13, 2008

JLP posted this morning and asked “Should Bankers Get Bonuses This Year?” His answer is apparently “no” based on the premise that “when the results aren’t there, the bonuses shouldn’t be either.” And since banks have had a bad year, bonuses shouldn’t go with that.

That makes perfect sense, but the problem comes in defining a “bad year,” which is means different things to different bank employees. Sure, if the CEO is compensated based on stock performance (which many if not most are, at least partially), then he or she should not – and probably will not – get that bonus this year. But the vast majority of bonuses in the financial (read: sales) industry ARE based directly on performance, and the employees are paid only if they accomplish the goals that were laid out for them for the year.

For example, I am a Private Banker. My bonus depends on my own personal portfolio and the net interest revenue it generates (i.e how many fees I charge, how many loans I close, how many deposits I hold). If I meet certain explicit goals (increase my net interest revenue by X in 2008), I get a bonus of 20% of my salary each year; if I exceed my goal I can get 10 cents on every extra dollar of net interest revenue, with no limit (which has yet to happen I might add)!

Many of my colleagues in fact WON’T be getting bonuses or will be getting much smaller ones than usual because they had loans go bad or were unable to get enough new loans approved in this economy to reach their 2008 goal.

Bonuses are a very large part of most bankers’ overall compensation, and remember how many different employees exist in “banks” these days:

  • Tellers get bonuses based on how many checking accounts they open.
  • Branch managers get bonuses based on fee revenue and how low they can keep expenses.
  • Portfolio Managers get bonuses based on the performance of their funds and/or the amount of fee revenue they generate.
  • Special assets managers get bonuses based on the per cent of bad debts they recover.
  • Mortgage lenders get paid based on the volume of loans they get approved.
  • Financial Advisors get paid a percentage of their fee revenue or by bringing in a certain number of new clients.
  • Hell, the mail delivery folks might even get bonuses based on accuracy and punctuality goals.
  • Also consider the portion of that allotment that goes to signing bonuses and moving bonuses.
  • Some employees get bonuses for passing certain tests (actuaries, for example).
  • Etc.

I could go on and on; the bottom line is that bankers are given bonuses based on fee income to the bank – whether in the form of mergers and aquisitions, interest rate swaps they set up, loans they underwrite, deposits they manage, letters of credit they issue, or whatever else they do at the bank. Sure, altogether the bank may not be performing well; but millions of bank employees are doing their job and meeting the goals that were laid out for them. Taking away their bonuses is akin to just cutting their salary.

Now maybe those goals were bad goals – and that’s management’s fault. Somewhere up the ladder somebody’s bonus should be suffering when banks are losing money (the CEO, for example). But when you are talking about millions of lower level bank employees who don’t chart the bank’s course, it’s not really fair to say “they shouldn’t get bonuses” just because the stock price tanked or because it would look bad in the media.

I’m not saying that some exectuves are not way overpaid, largely in the form of bonuses. But for 2008 the bonus promises have been made, they are largely based on measurable goals, and for the most part they should be kept.

More from Meg at The World of Wealth

10 responses to Banker’s Response: Should We Get Bonuses?

  1. Meg, thanks for offering the other side of the story! I, for one, really appreciate it. 🙂

  2. Thanks Meg!

  3. Meg,

    Make some great points that are easily missed in the route of emotion when it comes to examining this crisis. Perhaps it is not the bonuses, but the incentive structures we need to look at. You mentioned bonuses can be tied to the volume of loans approved.

    When I studied corporate crime in some of my undergraduate work, a lot of time we look at the situation as the result of a few “bad eggs”. But by just punishing a few bad eggs, the system in which they were working is not fully examined and in effect for the 2-5 headline court cases, there are 100’s if not 1000’s of others who get off the hook.

    In short I think George Soros is really on to something with his view of the market…and I also like Robert Kiyosaki because most of these problems stem off the fact that when the dollar was taken off the gold standard, it seems all bets were taken off in terms of what things are really worth.

    I am a believer in being fully responsible for myself and making sure I read any and all fine print when it comes to signing documents, especially those that pertain to my finances.

    As a future healthcare provider, I’m required to give informed consent before I give any treatment to patients. As financial decisions have comparable weight to health decisions in terms of potential outcomes, perhaps there should be some form of informed consent in financial consultations. As a healthcare practitioner, just because I had a patient sign a form doesn’t mean I’m protected. Shouldn’t a financial advisor/bank employee be held to a similar standard?

    Most people view banks not as products of any sort of market dynamics but as a protective institution for their assets. The same goes for healthcare, with the asset being health. Is it any wonder that when you apply market dynamics to these institutions that the system finds it difficult to sustain?

    I really think the scariest part about our current economic climate is you have so many disasters working at once, banking, healthcare, energy….The financial sector was the first to go. I think we haven’t found answers because we are unwilling to make the choices that will result in short term loss, despite the longterm benefits.

  4. “Now maybe those goals were bad goals – and that’s management’s fault.”

    I think that statement is the crux of the argument, due to management’s setting of bad goals the banks have created a huge mess that threatens the entire economy.

    I fail to see how the bailout should be used to pay for bonuses. Bonuses should only be paid if the company is profitable which in these cases they are not.

    This is the problem of people using bonuses as must haves. When we make bonuses an entitlement they go against why they were created in the first place to give incentive to profitability. Sorry no profit, no bonus, no bailout money.

  5. i have to agree with one of the previous comments about the incentive structure is poorly conceived. when so much of the expected income is tied to bonuses (ie. for some execs it is more than their annual salary!), there is something wrong there. i work in the pharm industry and, in general, i really can’t expect much more than 15-20% of my annual salary as a bonus unless it is an awfully great year for the company (which it WON’T be this year). if an I-banker has an annual salary of $200k and gets a $300k bonus, his/her income should be restructured to be $400k annual salary with $100k potential bonus. That way, so much of his/her income won’t be tied to how much “bonus” he/she receives. just my opinion…

  6. Management or not, I fail to see why folks who are effectively public employees are eligible for bonuses. And I’m not just saying that because _I_ don’t get a bonus. I’m saying that because it isn’t right to use taxpayer money to pay bonuses in my opinion.

    If the choices are (A) Bank goes under and you can lose your job or (B) bank gets bailout money, I’m sure many employees might take option B without bonuses. Or am I off base?

  7. Nice post, Meg.

    I understand your points and they make sense.

    However…

    If a company’s finances are so dire that they must receive bailout help from the government, then they really have no business paying out bonuses. Afterall, shouldn’t bonuses be based on the overall health of the company?

  8. Amazingly self-centered

    Buck up and be happy you have a job

    Deal with it and move on

    No money, no bonuses
    Let’s not be a hypocrite, ride it out like the rest of us

  9. Deanna,

    I read nothing self-centered in Meg’s post. She was offering her perspective.

  10. Great points all. I do agree that if a company is receiving bailout money then all discretionary bonuses and performance bonuses to executives should be non-existent.

    And I do agree that the compensation system is flawed in many cases. At some banks executives are paid on the prior quarter’s stock price, causing them to have a very short term outlook. Also, when bonuses are linked to volume instead of profitability, it encourages sloppy lending.

    I like how our bankers are compensated because it’s tied directly to bank profitability – and if one of your loans goes bad your compensation is directly affected (and you’re probably fired unless it was totally unforseeable). It’s much more difficult for the individual bankers, but it only seems fair.

    @ Deanna, I’m not sure how anything I said is hypocritical- and I am happy that I have a job; I’ve had several friends get laid off this month. And my bank is not accepting any bailout money, so I’m not sure how I’m being hypocritical. Just offering another point of view.