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.