Wall Street’s obvious response to the outrage over bonuses has been to reduce “bonuses” and jack up salaries.
Wall Street’s rainmakers still take home just as much money as before–they just get more of it every two weeks instead of in a lump sum once a year.
Those who think Wall Street pay is morally unfair will be incensed by this. Those who work on Wall Street, meanwhile, will still begrudge the annoying restrictions on how private firms pay themselves. But the irony is that this change will actually be better for everyone involved: The firms, the firms’ shareholders, the taxpayers, and the folks who actually take home the money.
Because the “bonus” portion of Wall Street pay will once again become more of a variable “reward for good work” that it once was, instead of just the lump-sum payment of guaranteed compensation that it has become. And because higher salaries will encourage highly paid employees to focus more on long-term franchise-building and less on near-term get-rich-quick dealmaking. The latter, to some minor extent, may encourage deal-makers to make less-stupid bets in the future than they have in the recent past.
As Andrew Cuomo pretended to discover this week, Wall Street “bonuses” aren’t usually “bonuses” at all. They’re just lump-sum compensation. Most of Wall Street’s biggest rainmakers have contracts that stipulate exactly what they’ll get each year (or at least the minimum they’ll get), and if they didn’t have these deals, they would go work somewhere else. A rainmaker’s performance in a given year, therefore, might affect the amount over and above this year’s minimum guarantee he or she gets, and it might affect the next contract he or she signs, but it won’t affect this year’s pay. So we might as well stop calling these payments “bonuses” and start calling them what they are: compensation.
Second, right now, the huge weight of the bonus payments as a percentage of total comp encourages rainmakers to focus too much on “revenue booked this year” and not enough on “building the franchise for the next 10 years.” A rainmaker who takes home $3 million a year, for example, might get paid a $200,000 and a $2.8 million bonus. When this much weight is placed on the bonus, it’s no mystery why employees obsess about it. To the extent that some of the bonuses ARE dependent on an employee’s performance in a given year, the current structure promotes near-term deal-making instead of long-term franchise-building. If, instead, the rainmaker had a salary of $1.5 million and a potential bonus of $1.5 million, he or she would naturally place more emphasis on doing deals that ensured that he or she would still have a job in three years–instead of just trying to hit the ball out of the park this year.
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