A big criticism of Wall Street bonuses throughout and after the collapse of the financial industry has been the idea that executives were awarded over-sized bonuses while their companies fell apart. Wall Street fought back against this criticism, usually with the explanation that bonuses were paid in accordance to contracts that were signed before the economic collapse.
A guaranteed bonus seems to defy the concept of itself; it’s really just another form of compensation that an employee can rely on. On the other hand, a true bonus should be tied to some sort of measurement of success, and the tighter the bonus is tied to an individual’s effect on the success of the company, the better. For a sales representative or broker who brings in $5 billion in new business, it’s hard to deny a $1 million bonus would be appropriate (0.02%), and feel free to go higher. Rationalization gets murkier when the broker brings in $5 billion in new business but the company loses a net $50 billion over the previous year.
Goldman Sachs, a company that took bailout money from taxpayers and then proceeded to pay its executives massive bonuses with its cash, recently announced that it will tie some executives’ bonuses to long-term financial performance.
One of the keys to a good system of rewards is to provide an incentive timed closely to the action that merits the reward; otherwise, the cause and effect are muddied. One year in the company which until recently was my employer, a publicly-traded company on the New York Stock Exchange, executives announced a company-wide bonus immediately following our annual financial performance was released to the public.
A year’s results may not be long-term enough, however. Companies were making billions of dollars year after year on credit default swaps and mortgage-backed securities until these derivatives were shown to be of little value and expedited financial collapse. Even with a reward system that looks at the annual “long-term” results for its definition would have allowed those who created short-term profits for these companies to lock in billions in bonuses.
If companies want to tie bonuses to long-term results, they should be waiting ten to twenty years to determine what has truly been good for the company. Of course, no executive wants to wait more than a decade to find out what their compensation will be. As it is, many companies offer these bonuses in deferred compensation, so although executives know what they’ll be receiving, it may be some time before money changes hands.
As the best executives for the most part gravitate towards the most favorable compensation packages, bonuses based on real long-term results would be a hard policy to adopt throughout an industry. There are no good solutions to this problem. I have no problem with companies making massive profits compensating those who helped create those profits, but when those profits are found to be based on shady operations, misleading deals, or outright lies that don’t come to the surface for years, there should be a way for those who profited to be held financially responsible.
Updated December 22, 2011 and originally published December 27, 2010.