Financial institutions, particularly those with financial advisory services (investment banking) or internal investment operations (merchant banking) or fund management, have mechanisms to compensate their revenue-generating employees with exceptionally high bonus plans. In traditional sales jobs, most of us are familiar with1%0-15% sales commissions that compensate, for example, salespeople who work selling new cars in dealer showrooms. Sell a fleet of automobiles to a large taxi company, for example, and you can make a lot of money.
But in big financial institutions, there is a hierarchy of people involved in any single major transaction. Managing directors and senior managing directors sit at the top of the transactional food chain, and below them are vice-presidents, associates and various staff experts whose analysis and opinions are vital to justify and close big deals. This complex maze of highly educated people, often graduates of the top economic and business programs at our best universities, are the heart and soul of the financial world. Those who can afford to hire the best get the best insights, new ideas and the most effective analysis.
Hence, there is an effective “team” – often different folks on different transactions – that provides the overall value to closing a mega-deal. A simple commission structure could not possibly cope with the moving target of individual expertise and client-generating rainmaking. Hence, the notorious Wall Street bonus structure. The differentiating factor in financial institutions from ordinary corporate structures is that the super-high levels of compensation normally reserved to those at the very top of normal corporations are spread among literally thousands on individuals who work within a financial institution’s value train.
In big financial institutions, there can be a thousand or more “managing directors,” with a multiple of vice-presidents and associates beneath. Each member of these financial teams is compensated differently based on the obvious criteria in the process of revenue generation. Most senior players are also major shareholders in the overall company as well. It is important to understand that mega-dollars are spread far and wide within a successful investment or merchant bank, and often even the top officers of the financial institution may find that they are eclipsed in earning in any given year by a star managing director who closed a huge merger with a Fortune 100 company.
As companies that took TARP money or have accessed cheap funds from the Federal Reserve or benefited from other government subsidies free themselves from TARP compensation restrictions, they are most certainly in the spotlight. Million-dollar bonuses, paid pervasively through the system will draw obvious criticism. Britain reacted by passing an instant tax of 50% on such bonuses; France and Germany are expected to assess comparable windfall bonuses taxes as well. The U.S. government has tried to cap the earnings of top executives, but as you can see from how our financial institutions are structures, this has little or no impact on excessive pay.
Goldman Sachs, which is no longer subject to U.S. executive bonus restrictions because they have repaid their TARP money, nonetheless faces particular scrutiny because the amounts of their bonuses are, to put it mildly, embarrassing in this time of crushing unemployment, impaired credit and contracting economics… much caused by large financial institutions creating an unsustainable economic environment of over-borrowing that literally collapsed our entire financial system and tanked values from homes to corporate assets.
Goldman is having one of the best years in their 140 year history: “A year after the government rescued the financial system with billions of taxpayer dollars, banks are preparing to pay out annual bonuses that could rival those of the bubble years. Nowhere is the bonanza expected to be bigger than at Goldman Sachs, which so far this year has set aside a record $16.7 billion to pay its workers, or roughly $700,000 per employee.” December 11, 2009 New York Times When you figure that the clerical people in that mix are not the recipients of the big bonus checks, you can pretty much figure out that for the managers, a $700,000 per-employee payment is hardly the average.
By the time someone reaches the highest levels of executive responsibility at institutions like Goldman Sachs, they are already mega-millionaires. Rich by any definition of rich. But Goldman is looking for ways to deflect the criticism – their “I’m Scrooge McDuck wallowing in my money-lined private vault” image – in the wake of being beneficiaries of federal largesse and partial causes of our financial meltdown. Their solution: “Bowing to calls for restraint in tough economic times, Goldman said that its most senior executives would forgo cash bonuses this year. Instead, the 30 executives will be paid in the form of long-term stock — an arrangement that means they will not get big year-end paydays, but one that could turn out to be enormously lucrative if Goldman’s share price rises over time.” The Times.
In the end, there is a sense of outrage that those who contributed heavily to the environment that collapsed our economy and benefited substantially from government (taxpayer) money should not be allowed to wallow in wealth while the majority of the country wallows in economic misery. Hey, Congress, maybe you can learn a thing or two from Britain, France and Germany! And it’s not about 30 senior Goldman executives.
I’m Peter Dekom, and I approve this message.
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