I resisted writing about the bonus debacle because it was a little too close to home. After all, a fair portion of our household income is paid by a TARP-financed company and some of this money generally comes in the form of a bonus. Given the personal stake, I figured I wouldn't be the most rationale commentator on this issue. Ironically, recent events and the irrationality of legislators and the press helped me clarify and solidify my own views.
Bonuses are needed. Here's why:
Yes, too many people are paid too much. But, this does not mean that the concept of a bonus is wrong. You can question the size of the payments, but it doesn't make sense to claim that no bonuses should be paid.
Yes, bonuses are performance-based; so,where is the performance if your company loses billions of dollars and is funded by hardworking taxpayers. But, this is not an argument against all incentive pay. This highlights a problem with the structure of the compensation packages. The base salary within the financial firms is unnaturally low in relation to comparable positions in other industries. Within a finance firm, in an annual package of $10,000 your base salary is often only $2,500. The remaining $7,500 is paid as bonus. The $7,500 is based on the company's performance and your individual performance, but also consists of an amount that would have been part of your base salary had you worked in any other industry. Moreover, the individual performance piece serves as recognition of your last year's work as well as a retention incentive for next year. Thus, in 2009, the bonus will not include any part of the company's performance, but if the individual performed well and worked 12,14,16-hour days for the majority of the year, you have to recognize their performance at some level. In 2009, bonuses should definitely be lower, but not zero. Of course, this does not apply if you lost millions of dollars as the AIG finance unit and to whom the vast majority of AIG bonuses are being paid. This is just plain stupid.
Yes, there are few open jobs, so why pay any bonus as a retention incentive, you are not going to lose people anyways. But, you will lose the best. The best and brightest will find another opportunity and you will lose them at a time when you need them the most. Even if you don't lose them you will surely demotivate them when you want them to work their hardest. You just cannot deny the motivating power of money.
I recognize that the overal imbalance needs correction and many people have been paid too much for too long a time. But, that is a different conversation.
1 comment:
My salary and bonus are both derived from the financial services industry. Despite that I feel -
That was then- this is now
Employee compensation and bonus are determined by various internal and external factors. To put it simplistically salaries are typically based on employee experience, and company requirements, whereas bonuses are based on company and employee performance. What happens if an employee performs; but the company overall does not perform? Does the employee still deserve a bonus? Or even better, what if the company performs and has a profitable year, but an incompetent employee gets a good chunk of bonus, would you deem that as fair? Certainly, these are not questions with straight responses. But to some these questions have straight forward responses- no bonus, no, no- unfair.
The new owners or taxpayers are refusing to buy into the notion that the talent needs to be retained. They are prepared to face the consequences of letting star employees walk out even if this means to renege on prior commitments and promises. If I don’t pay my mortgage, I know the consequences are that I stand to not only loose my house, but also loose any financial credibility I may have gained over a period of my life time. If I am able but not willing to pay my mortgage fully aware of the above consequences then I must believe that paying the mortgage is far worst than loosing my home and credit. In other words the value of my house may be so under that at this point I may be wiser to walk out and start fresh rather than pay a loan on a depreciating asset. Similarly, as a new owner and a taxpayer I believe, in order to get a fresh start, I may be better off letting some of the star employees walk out on me, rather than me as a new owner, giving into their excesses. As a shareholder I will be intrigued to find out how much worse can banks perform once they are deprived of their key employees (self-serving in my opinion).
Besides, to put it bluntly as a new owner I do not want to compensate my employees in the similar way or to the same degree as the previous owner used to. If you don’t like my compensation you are free to take your skills and be rewarded by some other employer, or you are free to pay me back my money and I will leave you and your previous owner to decide how much and how often you should be paid
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