“To Bonus or Not to Bonus?”

In Financials, Politics on October 23, 2009 at 13:22

bank bonusBank bonuses have been on the front-page ever since the financial crisis started unfolding and the US government bailed-out major institutions. As I’ve written in previous posts, the problem of lack accountability in these groups supported by moral hazard, has been the “trademark” of excessive risk-taking. The risks those companies take work something like this; heads they win big-time, tails the taxpayer comes to clean up the mess. Does this sound like a fair game to you? Certainly not, but things are much more complex than you think.

In 2007, US executives were paid 275 times more than the average compensation of the workers at their companies. This number used to be 24 back in 1965. Who said the capitalist structure is the fairest of all? This is one of the prices the society pays for growth and prosperity.

It is difficult for government officials to restrict bonuses as it may cause these institutions to fly out to Switzerland, Asia or even the Far East for more favourable payment schemes. But what has the punishment for banks been so far? I reckon nothing..!

The Obama administration  and the Federal Reserve have moved forward in examining banks bonuses and compensations for 6,000 institutions. Treasury official, Kenneth Feinberg, said that cash salaries of the top executives of the seven highest TARP-aided institutions will be capped at $500,000. The rulings will apply for November and December and will be the cornerstone for next years amendments. Several banks have already overhauled their payment schemes shifting more resources to salaries than bonuses.

The proposals were a result of an escalating adverse public mood against bonuses, with Goldman Sachs, setting aside $11.4 billion on bonuses for the first half of this year, being its climax. Governments need to provide a realistic payment framework that will tie payments to stock prices and profit sustainability instead of revenues and turnover that would just fuel further excessive risk-taking. So the answer to our question is, to Bonus but in a smart and sustainable way.

by the Self-Seeker


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