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  • January 29, 2009 10:37 PM EST by Brian Sullivan

    The President Is Wrong On Wall Street Bonuses

    Hypothetical...

    A salesman for Company X - which makes widgets - has a quota of $1 million in sales per year.   His compensation is $50,000 per year base salary plus 10% of everything he makes over quota.   The salesman busts his rear all year, working the phones and hopping on airplanes.   He does well, bringing in $2 million in sales, doubling his quota.   His compensation is $150,000 that year.   Additionally, those on his work support team - back office, administration, etc - would also likely share in that success.  I suspect few in America would have a problem with that scenario.

    But what if Company X lost money that year because top management decided to get into the business of selling "whatsits."   The whatsits didn't sell, and in fact did damage to the company overall.   Now let's add that Company X was not only suffering massively but whose overall business is seen important to the American economy and it received Federal assistance to keep operating.   Should the salesman who did his job selling widgets and beat his quota not be paid his bonus?   If you say he shouldn't, you probably want to stop reading.

    Now let's turn that to Wall Street.   This will be one of the least popular stories I have written but it needs to be said: the President is wrong on the issue of Wall Street bonus payments and when he says Wall Street should have "know better."  Just as we should not lump any group of disparate individuals together to make a political point, neither should the President and his cabinet lump "Wall Street" into one, singular group of financial evildoers.

    The President is wrong on the bonus issue for the following reasons:

    • Most of that $20 billion dollar bonus figure thrown around Washington goes to the rank and file and not the top executives
    • Many banks factored into this bonus pool did not take TARP money
    • Most of the bonuses are paid as a percentage of sales and profits, and there are many on the Street who had nothing to do with the economic collapse and made money for their firm
    • Most CEOs have canceled their bonuses (or been fired)
    • Bonus payments have already fallen by nearly half
    • As equity shareholders in many of the big banks, Americans now have an economic incentive to keep the best workers at the firms they now partially own

    Thursday the President once again attacked Wall Street, calling bonuses "shameful" and making other strong remarks (video) about financial industry pay.  While no one can or will defend money-losing CEOs giving themselves multimillion dollar payouts, it is important to differentiate between the C-suite top executives and the majority of those working in finance.   Let's put aside the rhetoric and examine the reality.

    First, Despite the big headline numbers Washington likes to throw around, bonuses are already way down.   From the office of New York State Comptroller Thomas DiNapoli:

    Cash bonuses paid by Wall Street firms to their New York City employees declined by 44 percent in 2008 in response to record losses suffered by the securities industry.   DiNapoli noted that the federal Troubled Asset Relief Program (TARP), which infused billions of dollars into the financial system, helped prevent more institutions from failing. TARP placed restrictions on bonuses for top executives and many have voluntarily forgone bonuses, but it did not impose limitations for lower-level employees.

    Next, what many in Washington (and across America) forget is that most people on Wall Street are, at the core, salespeople.   Additionally, the majority of "Wall Street" - despite politicians who like to lump the hundreds of thousands of financial industry workers into a single group of "them" - had nothing to do with what is happening right now with the economy or credit crisis.  They are a diverse group who do thousands of different jobs across a variety of industries.   Stock brokers, commodities traders, investment bankers, and the hundreds of other specialized careers in finance have little to do with each other, much less be able to be harvested into some "group" to be singled out for misdeeds.   The President likes to use phrases such as "Wall Street folks" when making critical comments about the state of the economy.   That is no better than saying something to the effect of "those folks in California" should've "known better" than to buy homes when the market was clearly in a bubble.

    What is also misunderstood is that many on the Street make a majority of their pay through a bonus.   This is not just the highest paid investment bankers and traders.  It is also the secretaries, administrative staff, and hundreds of other positions that support the company.    Guaranteed salaries among much of this group can actually be relatively low, and there are many positions where more than half of compensation comes in the form of a once a year payout.

    Outside the upper echelon of management most highly paid financial professionals merely have a product, sell it, and make a percentage of the revenue and profit.   If an oil trader makes $10 million dollars for his firm, he expects a percentage of that profit to come back as his pay.   If he loses money he won't get anything but his base salary and probably a pink slip.   Bankers are the same way.   They help companies buy and sell each other.   If they do deals, they get paid.  If not, they don't.   Despite the mystery surrounding much of finance, most Wall Street workers are not that different than other sales driven industries.   Those who peddle software, cars, toothpaste or the thousands of other products sold around America each day face the same reality: sell, make money for the company or face getting the boot.   Most lawyers by the way, the previous occupation of most on Capitol Hill, operate the same way.

    Right now you are no doubt saying I am wrong (if you are still reading at all).  After all, you say, Wall Street helped create the crisis and are now asking for taxpayer money and using some of that to pay their workers.  That's wrong, you say, and so we should penalize the lot of them by getting rid of their "shameful" bonuses.  Let's say then for arguments sake that you are right and I am wrong.   Let's use that same logic to another end.

    If the idea is that industries who 1) helped promote the economic collapse through 2) over zealous and some say greedy behavior and 3) who are now getting Federal help should not be able to receive the pay they earned that may have been related to the economic crisis, shouldn't it also hold true then that others, and not just Wall Street, face the same penalty?

    If you answered yes, then should we ask all the others related to and involved in the housing boom and economic malaise to "know better" and give up all future commissions on what they sell?  Should realtors not receive their sales commission because home prices are down 30% in some areas, the market was clearly in a bubble that should have been obvious to many, and now their industry is receiving Federal assistance through the Treasurys buying of mortgage related assets?   What of the auto industry?  GM and Chrysler accepted Federal money to keep themselves in business.  Does this mean that the car dealer who sells a GM or Chrysler product should "know better" and refuse to accept a commission on the sale because the car companies got themselves into trouble and needed rescue?

    The answer on both of the above examples is "of course not."  The majority of realtors, mortgage brokers, car salesmen and others associated with at-risk industries had nothing to do with the global crisis we now face.   Wall Street, despite what many want to believe right now, is much the same.   As with most companies, the big decisions - like begging for TARP money - are made at the top, by a small group.   Many of the people I know on the Street also believe many of their top management needs to be fired.

    I am not a Wall Street apologist.  There are those on Wall Street who deserve to be stripped of their jobs and their headline-making compensation.   Those are the people at the top making the macro calls on company strategy, as well as the small group of those directly involved in selling the most toxic of assets.   But despite the desire in Washington to find a convenient scapegoat for the downturn we cannot punish the many for the mistakes of the few.  The majority of those working in finance do not receive million dollar bonuses.   Demonizing profit-based packages for those who earned it strikes at the very heart of capitalism.

    Two other points:

    Tax filings show that the President's 2007 income was $4.2 million dollars, based primarily on sales of his book.   He was a Senator in 2007, a year when the U.S. government ran up huge deficits and failed to anticipate the economic collapse.  Should he give some of that money back because the government needs to bail itself out?

    Additionally, before the government throws stones, it should look at its own home.  This excellent Bloomberg story outlines how the government isn't exactly managing its own "bonus home" very well either.

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analytically speaking

Q1) Does the Street add any real value to our GDP - or it's a "service"? Q2) What's its product - speculative fees & analysis? Q3) Couldn't the 'quants' apply math towards nobler endeavors, instead of self-feeding trading models based on implicit assumptions that nobody understand (CEO and board)? Q4) Is there a future w/o 'profitable' (1st to itself) financial industry? We hope so.

January 30, 2009 at 8:14 am

K B

You are neglecting one very important point. When a car salesman sells a car, his product, the customer takes the car, the dealership is paid, and the transaction is complete. When the product is money (say the "bank" financing that car)the "sales cycle" is quite different. When your job is to loan money, and you deliver the money (the product) to the customer, the cycle has only just started. The cycle isn't complete until the customer has satisfied his requirements which, in this case, includes paying the money back - with interest. This cycle doesn't apply to stock brokers or investment bankers unless they also lend the customer the money to buy the security or buy the company. This is something that too many bankers don't seem to understand either. I have no doubt that many of the "Wall Street" people who got these bonuses are more like the car salesman, I am equally sure that many others don't really fit that "cycle." As for the homeowners, it's not that they should have known there was a real estate bubble but they SHOULD have known that they were borrowing money that they quite possibly couldn't pay back. The point is, as many people keep saying, there is little or no responsibility, little or no accountability. For the true stock brokers/traders and commmodity traders who were simply buying and selling these products on behalf of their clients or firms I tend to agree with you, but how much of that money went to them?

January 30, 2009 at 8:00 am

james bond

Bryan - Obviously you do not want to offend people on the Street because they won't come to your show - and that'll be the end of you career. Fine, bonus is paid if the company. As you said "Workers only receive bonus if they earn it by making profit for the company or being an equity partner in a profitable firm." So how can one justify giving bonus at Merrill, Citi and UBS? Also, if an oil trader makes $10 million, he gets a bonus but if a CDS trader loses $100 million, he does not get a bonus but is he supposed to return bonuses he got for the previous years? NO. Bryan, you are defending the culture of HEAD I WIN TAIL YOU LOSE?

January 30, 2009 at 7:44 am

Tbessi2

This is what happens when you bail an industry out. The bail out was shameful last year and this stimulus plan is shamful. The founding fathers never intended for our government to have this kind of influence in the free markets. It is our fault this happened, the government should have never stuck its nose into thing in the first place. If you could turn back the clock and not bail them out I bet they wouldn't be paying these kind of bonuses. We've had 16 years of terrible monetary policy. Prepare for another 4 to 8 years.

January 30, 2009 at 7:20 am

fatjoey

"sales people" and just like a used care saleaman you all sold your soul's to the almighty DOLLAR!!SORRY SPORT BUT ANYONE WOKRED ON WALL STREET THE PAST 3 YEARS SHOULD BE STRUNG UP OUT FRONT!

January 30, 2009 at 7:12 am

Eric

I'm not sorry to say you're wrong. In fact, I think Fox News needs to implement a manditory drug testing policy and start with you. A bonus is a financial incentive offered to spur excellence among employees. An excessive bonus might be warranted for a corresponding degree of excellence. Mediocre work requires no bonus and poor work is cause for termination - a term that ought to be considered in a literal sense for some of these morons. If giving a bunch of empty suits a free hand out is OK, why isn't no proof welfare for singe moms, orphans, and other ordinary people (and more each day) OK? I don't care how you spin it be you a communist, socialist, republican, democrat, anarchist, or fascist: rewarding incompetence is wrong. If we continue to make it OK, we'll likely be annexed by Honduras in the near future.

January 30, 2009 at 7:01 am

Carol Bird

Don't you think Obama is aware of every point you're making, or is he stupid?

January 30, 2009 at 6:54 am

Tom Gordon

Oh my. The state, big government, has to save the financial institutions from collapsing, because they 'are to big to fail'. The financial institutions don't want the forces and laws of the market to apply to themselves? And still the creators of this debacle are requesting bonuses and are even using the money they got from big government to fill their pockets? Thousands and thousands of people are losing their jobs. And still the people on Wallstreet cannot even once be humble? That's so sad.

January 30, 2009 at 6:25 am

John

"...While no one can defend money-losing CEOs giving themselves multimillion dollar payouts, it is important to differentiate between the C-suite and the rank and file on the Street..." What?! Are you kidding? What "rank and file on the Street" wouldn't give their right arm to trade places with the C-suite and get that multi-million dollar bonus? That's why they are working there! To even think of defending the Wallstreet types at a time like this, shows how seriously screwed up your judgment is! You think you're gonna get praised for being right with the details? This is a classical example of insistence on "being right at the wrong time"...Pathetic!

January 30, 2009 at 6:06 am

Tully

May I say that I have read a lot of rubbish in my life time but your very poor and overworded attempt to defend those who run Wall Street is right at the top of the heap.Face the truth these so called sales people failed miserably to sell their goods in a way that would benefit anyone except the companies they worked for,therefore benefit themselves.They all stuffed up badly so not one of them should get any kind of bonus.Remember bonuses are only for those who make money and not for those who loose money.You may convince some that your views are the right ones but I know that the majority of us will tell you to politely GET REAL and that they do NOT deserve any BONUSES AT ALL!

January 30, 2009 at 4:56 am

Michael P. Williams

There is an interesting dual irony in the recent earning of near-record bonuses by the executive corps of the nation's major commercial and investment banks. First, and contrary to both intuition and generally-accepted standards for performance-based remunerative reward, a banking executive on Wall Street can apparently earn a multi-million dollar annual bonus by either contributing to the success of his/her business or contributing to its complete unraveling -- it doesn't seem to matter which one. Second, the Wall Street banking community, in justifying multi-million dollar bonuses as part of their executive compensation programs, point out that these bonuses are a competitive requirement for recruiting the best talent that they can find -- apparently, second-string executives, who work for a lot less, are almost incapable of destroying the fortunes of a bank and its customers in the grand style that comes so easily to the more highly-compensated cream of the crop. Go figure. Michael P. Williams The Woodlands, Texas

January 30, 2009 at 4:20 am

Advisor

Thanks for sharing an objective perspective. I work for one of the nation's leading banks, a bank that was forced to take TARP funds, & then needed additional funds to complete a deal urged by the Government. Now that bank is criticized regularly and often unfairly. The fact is, most of the executive officers of the Wall Street banks have not taken a bonus this year. As an advisor, I indeed am in sales. A portion of my compensation is retained through the year & then paid to me in a bonus, as well as discretionary funds if goals are exceeded and all of my employer's expectations are met. We learned several weeks ago that the bonus that we earned throughout 2008, even if we met every expectation, would be reduced by 50%. That is fifty percent. These are not bonuses for "fat cats." These are bonuses paid annually to those who qualify through hard work and exemplary performance. Thanks for accurately explaining that Wall Street's bonuses are not just for wealthy CEO's, but also for the hardworking American rank & file.

January 30, 2009 at 1:44 am

MM

I agree with your analysis. I have friends who work on Wall Street as Associates and Analysts. They put in 80 hour work week. They are paralegals, technical staff etc etc who did not create this mess. Clubing them with the executives who make millions is not fair. Also, the report that has created such a furore is misleading. Bonuses are typically paid in February for the year gone by. So the 20 billion in the report was probably for year 2007 and was distributed in Feb 2008 which was well before we got in this hole. The bonus for 2008 will be paid in Feb 2009 (I know Merill jumped the gun).

January 30, 2009 at 1:01 am

sayrock

So, what you're saying is that holding the "commission/bonus" carrot in front of Wall Street "sales people" justifies the act of selling worthless toxic assets? Or are you saying that it's OK because they didn't know that what they were selling was toxic? If so, then are you saying, it's OK that they are out there selling securities they didn't even understand because the more they can push, the more commissions they will earn? Sorry, your argument doesn't hold up. I've worked in the securities industry and left it because of the greed and immorality. Don't tell me about "hard working" people with altruistic visions of themselves, their work, and their clients. Nobody on Wall Street operates in a bubble. They all know the score.

January 30, 2009 at 12:12 am

floyd

HOW TRUE. VERY WELL WRITTEN. MY WIFE IS A REALTOR {BROKER} UPON SEEING AN UNSUBSTAINABLE PRICE STRUCTURING, 15% ANNUAL INCREASE IN SALES PRICES, DECIDED THAT SOMETHING WAS VERY WRONG. AS EARLY AS 2004, SHIED AWAY FROM PROMOTING OVERPRICED PROPERTIES, NOT WANTING TO SEE HER CUSTOMERS BECOME TRAPPED. LOSE SOME SALES? YES. HAVE ANY PROBLEM LOOKING PAST CUSTOMERS IN THE EYE? NEVER. ETHICS CANNOT BE PURCHASED, YOU EITHER HAVE ETHICS OR YOU DO NOT. MOST POLITICIANS ARE WITHOUT ETHICS, HOW COULD THEY FACE ANYONE IF THEY HAD ANY? CHRIS DODD A 4% LOAN FROM COUNTRYWIDE, CHAIRMAN OF THE BANKING COMMITTEE, WHY IS HE NOT BEING INVESTIGATED? WTF?

January 30, 2009 at 12:04 am

jim leduc

What a great reflect/deflect article. And a not worth reading one. This guy wants us to overlook the greed manifested by the many people who are responsible in a great way for our economic woes. His logic sucks and his writing is not far behind. Sorry I read this (the title drew me in). It was a complete waste of time.

January 29, 2009 at 11:48 pm

williambanzai7

Sorry, you are wrong. The financial services industry is a bloated dinosaur. Most of the people employed on Wall Street live beyond their means. Why should the government be prop an industry that would be undergoing a massive restructuring. Without TARP money, the bankers would be on the streets. Man have already been laid off, but we have only scratched the surface. Its too bad many will have to pack their bags and leave NYC to find a productive living. As for real estate brokers. They are what they are. Its in their nature as the saying goes.

January 29, 2009 at 11:38 pm

about this blog

  • Brian Sullivan joined FOX Business Network (FBN) in April 2008 as an anchor. He co-anchors the 10am-12pm ET hours of the FOX Business block. Prior to joining FBN, Sullivan served as an anchor for Bloomberg Television where he hosted the programs Morning Call and In Focus.

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