Why do bankers get such large bonuses?

Corporations pay taxes on profits…spreading the companies wealth by giving out hefty bonuses does 2 things…retains those heavy hitter superstar employees who generate these profits for that corporation and reduces the taxable level of profits so they pay less taxes. Either way that corporations was not going to be able to enjoy that money….either it goes to taxes or to the employee…best to make the employees happy!

Because they can.

There is a mistaken idea that large sums of money are made when entrepreneurs take great risks. Originally these pay schemes were meant to encourage employees to take greater risks with the reward of greater payoffs.

It has been carefully shown that the greatest entrepreneurs with the largest fortunes are actually the most risk-averse, so what this pay scheme has actually done is to encourage the kind of froth and bubbling that nearly wiped us out a year ago.

However, it is so ego-syntonic for the bankers who make the huge amounts of money to continue the scheme, that we can expect more bubble, and ever more threatening and dangerous busts, except in the unlikely event that they change, or are forced to change, their remuneration schemes.

@dpworkin , This brings up two questions.
First, if the studies show that being risk adverse is more profitable, then why have the banks not caught on?

Secondly, Why did the bankers get bonuses when the banks lost money and had to be bailed out?

I thought I explained the first question when I said the current scheme is too ego-syntonic to be replaced.

The answer to the second question is that with so much in flux, banks were frightened of losing their “best” performers to competing institutions. Personally I feel that is an empty bit of reasoning. If a worker of mine had no loyalty to me, I’d be glad to see him gone.

@dpworkin With that mindset you would be out of business in a blink of an eye! Superstar high performing employees for the most are loyal to their paycheck and bonuses and you most likely knew that when you negotiated their compensation contract. The second you waver on their compensation they will be out the door and at your competitors faster than you can say show me the money!!

That’s what they are said to fear, so that’s why this insane compensation race continues, to everyone’s detriment save the individuals who are enriching themselves on our folly. They are like wolf packs, and must be reined in.

Does anyone know what the actual breakdown of these bonuses is? We hear huge numbers, but those are usually totals of all bonuses. I’m sure some top executives are getting outlandish bonuses, but aren’t there also lower level bankers getting smaller bonuses out of that chunk of money? I got a bonus this year. Just enough to buy that new sofa the wife’s been wanting. Merry Christmas, hon.

Think National Lampoon’s Christmas vacation. Not every bonus is to a multi-million dollar high-flyer.

@dpworkin And that is exactly what happens with Capitalism all over. Apply the same competitive mentality to say, cities, as has been done more and more since the 80s, and what you get is a global race to the bottom of cities offering lower taxes, then running out of money and not being able to afford to pay city employees a living wage, cutting services, etc. Or they don’t offer the lower taxes and business moves away, they run out of money and can’t afford to pay city employees a living wage, have to cut services, etc. Either way, everybody loses except the shareholders and executives of those companies.

Capitalism works wonderfully well when it is properly regulated, which of course it always fights with all its might.

@dpworkin Yes, and it does it through its own built in competitive mechanisms. Somebody trying to regulate you? Threaten to move to a place that won’t. Create competition for the least regulation between the two locations.

That would be true only in an ideal world. We already know what a completely unfettered market does. That’s how the robber barons made their fortunes. There is no “invisible hand”. We need to provide whips and chains.

@dpworkin You realize I’m agreeing with you, right?

We’re just talkin’.

@dpworkin Oh good. So you’re saying the race to the bottom and competition among locations only happens in an ideal world? I think it is happening right now, partly because deregulation in the United States and global free trade agreements have brought us closer to that ideal unfettered market. I’m pretty well convinced that the Republican agenda in the U.S. is essentially to roll back the clock on all business regulation to 1900.

I suppose we’re getting pretty off topic now.

Because casino capitalism seemed to be capable of disguising speculative bubbles as healthy economic growth. As long as everyone agrees that the party must go on not much is happening. Bonus time is once a year. And if the bubble bursts afterwards at least in the past not much can be done (legally) to get the money back.

Remedy? Pay the 2010 bonus in 2014 measuring mid-term success.

Interesting idea, Matt.

I wonder what role chance plays in having a good year. How consistent are the top performers?

@mattbrowne It’s brilliant. I wonder how these bankers would respond if offered the chance to trade getting their bonus now for getting a larger one based on economic success in four years.

I work for a bank (in IT though). The discussion has started and new models are on the table. Chance is always playing an important role. This includes natural disasters such as Katrina, if you’re a crude oil futures trader for example.

Bankers who’ve got an honest interest in long-term success both for their clients and the bank they work for will accept this model. Gambling day traders will hate it.

That’s what happened at Goldman Sachs. The investment bankers in the very top echelon were replaced by traders.

Busy mothers.