We Made No Money. But I want BONUSES :)

We all know Wall Street has an ego. And we also know that a lot of people in the finance business think that they deserve BONUSES even when...the company they work for is not making money!

After seeing a great post by Jake from Econompic Data, I decided to write about my view on the subject here in the blog.

First, here is the "Investment Banker Matrix" which clearly states how Wall Street sees bonuses.

According to Investopedia, a bonus is:

" A reward paid to an employee at the end of the year. Many year-end bonuses are tied to performance metrics and the amount can vary depending whether certain milestones are met. Year-end bonuses are usually made up of lump-sum payments used to reward the individual for hard work and dedication. "

However, the real definition of a bonus has become: "you get one, no matter what".

The main argument for the "bonus no matter what" stance is that if it is done otherwise, the ‘talent' will be hired by competition. In a healthy economy where most companies are doing well, I could see that being a strong consideration.

However, Business Week had reported that up to  October 2008, more than 130,000 jobs had been cut in the finance sector. Now, that's right when the finance extravaganza began! Therefore, with all the job losses, the " I'm going to go work somewhere else" attitude may not work because firms are not hiring.

So, when Merrill Lynch [which failed/was bought out and reported massive losses in 2008] hands over billions in bonuses, I think there may be problem. Not only can the company not afford to do so, but it is also not aligned with the interests of the shareholders.

In general, when you have a company that is in the brink of collapsing, handing over millions or billions in bonuses is not wise. Why would shareholders want to retain "talent" when their shares may get wiped out by bankruptcy or collapse?

If the company survives and things get better, you can start giving out bonuses again and recruit more "talent" if necessary.

Economics is all about incentives, right? People do well and work hard, so you give them big bonuses. Shareholders are happy and employees and executives are happy. It's a win-win situation.

However, when a company is taken to the floor and is in horrible financial condition, what do you do ? D you give them more money? Or do you not give them a penny in bonuses and tell them to fix things up first?

People tend to forget that bonuses are rewards for doing well, working hard, and making the right decisions. This means that if things are not going well, you don't give them anything so they learn.

This post is not about bonus reform, but something needs to be done. In a few words, the whole problem with the bonus system is that it encourages (i.e. serves as an incentive) for taking higher levels of risk and making quick profits, which most times put long term goals on the sideline.

What can be done to fix this? I believe creating some form of 3 or 5 year-end bonus may mitigate some of the problems. You can still have your year-end bonus, but make it smaller and then create a 3 year bonus that rewards you  for the longer term success of the company.

But what about if you get fired or change jobs? Well, easy. You can just pro-rate it for the amount of time you where at the job.

Overall, this lets creates longer term incentives.

I'm not bonus expert, but I can assure you that the current system is flawed and needs to be fixed.

Cheers.

This post is brought to you by eToro.