Are Wall Street Bonuses Justified?

by Manshu on February 4, 2009

in Opinion

The general public is outraged at Wall Street bonuses, and everyone feels passionately about them. Let’s take a look at some arguments in favor of the bonuses, and their counter arguments as well.

1. Not Everyone on Wall Street is Guilty: There are certain departments within a bank or insurance company that made money for the company. If you don’t pay them bonuses – they will be punished for others’ mistakes.

  • The other side of this argument is that the taxpayers didn’t commit any mistakes, so why are they being punished by bailing out banks and financial institutions with their money?
  • Yet another argument is that – if a car company fails, then the people who fixed headlights or seat-belts would also lose their job (even if they did their job well). That is how the system works, employees share the fate of their company, in good times and in bad.
  • If Wall Street employees whose department made money could function as a stand alone business – they would certainly function that way. But, they need the assets of the whole bank or insurance company to work with, and to that extent they are not isolated from the fate of company

2. Bonuses are Needed to Retain Star Employees: If companies like AIG do not hand out bonuses to its star employees, they will move out to other firms, and the company will not be able to come out of the crisis.

  • If I have a reputation in the industry, wouldn’t my company’s competitors try to poach me? If I have a job-offer from a  stronger company with better prospects, wouldn’t I jump to that company, rather than hold on to a sinking ship? Or, would I rather take my year-end bonus, and then jump ships?
  • By giving bonuses to people with – bailout money – you are being unfair to stronger companies with better balance sheets. They should be the ones who emerge out stronger from this crisis, and capitalize on mistakes made by competitors.
  • This one is from Jon Stewart – “You don’t have any best employees”

3. Companies are Legally Bound to Pay Bonuses: Wall Street firms are contractually bound to pay bonuses.

  • There are laws in the United States to deal with insolvent banks. Those laws are not being invoked, and new rules are being laid down in the form of TARP etc.  If the existing legal framework was to be used, there wouldn’t be any banks in the first place.

4. In Wall Street; Bonuses are Part of Salaries: In Wall Street, your bonus can be twice the size of your annual salary. So cutting down bonuses on Wall Street is like reducing salaries of other people.

  • The counter – argument is that – on average Wall Streeters make thrice as much, as the average employee, and a comparison with other employees is not fair. Of course, the average Wall Streeter is much more qualified than other average employees, but this comparison is between apples and oranges.

5. Bonuses are already down 44%: When compared with 2007, the bonuses paid in 2008 are already down by 44% and this shows that the industry has already taken a hit.

  • This argument would have been valid, if the profits were down by about 44%. When companies are making billions of dollars in losses, how are any bonuses justified?

I hope I have been able to cover all the major arguments, I’d be really interested to hear arguments that I may have missed out.

{ 2 comments… read them below or add one }

richerandslimmer.com February 7, 2009 at 11:07 pm

Another reason why bonuses are good is that most people who work in wall street are highly motivated by money. The larger the sum, the more motivated they are to work. If these people weren’t going to get bonuses, they would probably not be doing their jobs properly. Now the counter argument would be that doctors, engineers, teachers etc. don’t get bonuses but still do their jobs properly, so what is so different about wall street bankers? Honestly, I don’t know. Let me know if you have any idea why.

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manshuv February 8, 2009 at 8:48 am

@Richerandslimmer – I have no idea why that argument would make any sense.
And you know what at the end of it all – I feel pity for banks that are actually liquidating. People working in these smaller banks must be really pissed off to lose their jobs, while guys at their bigger counterparts not only get to keep their jobs, but get bonuses as well!

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