Bonuses are not tips: Why we'll stay mad at Wall Street

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For many people on Wall Street, the rage generated by American International Group (NYSE: AIG)'s impressive bonuses was somewhat confusing. After all, while the insurer's position as a practical ward of the state makes its large payouts particularly upsetting, the fact is that bonuses are extremely common in the corporate world, and job applicants often regard them as a basic part of compensation.

To be honest, it's not as if alternate payment strategies are all that rare. Tips, for example, could be viewed as a sort of "performance bonus," presented to servers at the end of every meal. What's more, this structure encourages servers to maximize the quality of their service at each table. Similarly, numerous professions offer year-end bonuses to their employees, either in the form of cash, merchandise, or services. In so doing, they encourage employee loyalty and personal identification with the workplace.

On a more formalized level, the military enhances its relatively small salaries with housing allowances, health care plans, education programs and a host of other peripherals. For that matter, access to military clubs, discount stores and recreational facilities cut individual expenditures while encouraging military families to socialize. Taken as a whole, the military package encourages identification with the armed services and the establishment of a familial structure.

For the Army, and table-waiting, bonuses are entirely sensible. For Wall Street? Perhaps we need a rethinking. There are two key problems with Wall Street's bonus structure as it now stands. The first, which many analysts have noted, is that, by tying the majority of an employee's income to his or her yearly productivity, bonuses encouraged workers to narrow their focus to the extreme short term. Employees quickly learned that, by the time the long-term effects were felt, they would probably be working somewhere else.

The second problem is that, when bonuses become an established part of an employment system, workers begin to feel they are entitled to them. In this perspective, employees feel that simply showing up to the job merits extra pay. This, incidentally, is not limited to the finance industry: any worker who has grown accustomed to a yearly bonus tends to view its withdrawal as a form of punishment.

The trouble is, performance-based bonuses don't make a lot of sense when the economy is diving south. The fact that companies like AIG, Citibank, and Fannie Mae are still awarding them suggests that these bonuses are not legitimate, and haven't been for quite some time. After all, if a vice president at Fannie Mae were to be paid based on financial productivity, it seems likely that his pay would be massively cut, not enhanced. However, at least four top VPs at the company stand to receive up to $1 million each over the next two years.

Another class of bonuses are awarded for retention. Basically, this translates into money given to workers for continuing to do the job that they originally contracted to do. Many non-financial workers, particularly those who are currently struggling to find a job, are outraged at the idea of paying an employee extra money to keep coming in when things get tough. Three senior leaders at Citibank received $38 million in retention bonuses in 2008, although one, Michael S. Klein, quit a few months later. He subsequently got another $28.8 million in return for a promise to not work for Citibank's competitors.

The ultimate problem is that, unlike a server's tips or the military's peripherals, the financial industry's bonuses no longer appear to be tied to performance, generated income, or any other tangible metric. Under these circumstances, they seem comparable to methadone therapy, wherein a heroin addict is given a lower-potency narcotic to help get him or her off the primary drug. While this year's bonuses are smaller than last year's, they are still exceedingly expensive, and the taxpayers are justifiably enraged at having to pick up the tab for weaning over-privileged math prodigies off their huge paychecks.

If Wall Street wants to continue to feed its employees' addiction to large sums of money, then it needs to do so in a clearer, more transparent manner. Rather than offer a spate of extras, it should work all the current bonuses into the primary paycheck. Of course, when stockholders realize how much they are paying workers to lose money, there is sure to be another chorus of outrage.


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