After the devastating attacks Sept. 11, 2001, New York City felt different. The World Trade Center had collapsed, about 2,750 citizens had been killed and the dynamism of individual businesses and the labor market had been virtually suspended. Feelings of fear and doubt hung oppressively in the air like the sickly dust that wafted over the city for weeks.
The city reflected on what had been lost, but there were efforts to restore normalcy, and eventually, the economy began to mobilize. Wall Street firms began to hire and pay bonuses. Armed with these bonuses, bankers started to spend. The city became vibrant again, in part because these bonuses acted as lifelines for providers of goods and services. And, of course, there still were tax collectors.\nSix years later came another crisis: the economic meltdown of 2007. This time, however, Wall Street bonuses were fervently criticized by the public. Although only a percentage of the firm's profit, this payment structure incentivized employees to focus on short-term benefits at the expense of long-term goals.
But let's examine the issue of bonuses more closely. According to the New York State Comptroller, the average Wall Street bonus was $112,000 in 2008. In 2009, investment banks Goldman Sachs, Morgan Stanley and J.P. Morgan were set to pay an average of $250,400 in bonuses, with those at Goldman making far more, according to Bloomberg.
At first, these numbers seem astronomical, but upon further examination, it is clear that a few very high figures may skew these averages. Not all employees are paid the same bonus amount. For example, commodity traders might receive less money while those in wealth management might be paid more.
Even though banks are not using taxpayer money, bonuses still raise normative questions. The fact that 9.7 percent of our workforce is unemployed makes these bonuses that go to Wall Street seem more problematic. Keep in mind, though, that many professionals - such as entertainers and athletes - continue to make more money than those on Wall Street, while average citizens remain jobless.
One of the causes for public criticism was the fact that some firms, most notably American International Group, Inc., were using some of their Troubled Asset Relief Program funds to pay bonuses. Because TARP was funded by taxpayers, the public was unhappy that their money financed bonuses. But most firms, including the large investment banks, have already repaid the TARP loan in full. This means that any future bonuses paid will come from operating income rather than taxpayer-supported loans.\nThe question of whether the government should intervene to set bonuses in private business, specifically Wall Street firms, is difficult to answer. "Government set compensation" for private enterprises is problematic in a free market economy, Commerce Prof. Robert Webb said.
Though populist response to bonuses has been negative, bonuses are probably here to stay. In reality, it is hard to eliminate them.
"Banks are not charities," Webb said. "Compensation is determined by the market value of what employees produce and what other potential employers are willing to pay them."
Bankers who generate a lot of profits for their firms deserve higher compensation. Banks can raise base pay to augment a drop in bonus pay. Also, cash is not the only form of bonus. Some companies issue stock as part of bonus pay, as shareholders will come to regret.
Bonuses also are necessary to retain top employees. In the competitive business world, key employees often leave to work for private hedge funds or smaller boutique funds if their existing firm cuts back on offering bonuses. Webb explained that Warren Buffet, chief executive officer at Berkshire Hathaway, tried to change the bonus system for traders at Salomon Brothers to better align incentives of traders with objectives of the firm. He was unable to do so because more generous bonus systems available at Salomon's competitors would cause many traders to leave the firm. "Firms compete for talent," Webb said. "Wages differ according to the value of what's produced."
Besides, let's say you are an employee at J.P. Morgan who makes the company $10 million. Is a $200,000 bonus for all your 70-hour weeks justified? Probably so. The fact is that many people who earn these bonuses have to work very hard for that extra bit of their paycheck.
Overall, determining fair compensation through bonuses is a complex issue. Nevertheless, it is an issue for individual companies and their shareholders - businesses and people who generate revenue for great metropolitans such as New York City
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