When Wall Street Loses, CEOs Still Win

Lots of working folks hope to get a bonus at the end of a quarter or at year end. For most of us, there is an unwritten law about how to approach bonuses: It's great if they come, but we must not expect them, budget around them or plan for them.

The key word above is "most", because for a small but very wealthy minority, bonuses have become a part of life. For top Wall Street executives, bonuses are not only expected, but outsized in a way most of us can't even fathom. While you or I may hope a bonus can pay for a vacation or buy a new lawn mower, Wall Street execs have perennially receive bonuses that can buy a house – and a much longer vacation. (For more on the ins and outs of executive compensation, check out Lifting The Lid On CEO Compensation.)

A Long and "Upstanding" Tradition
In 2007, Wall Street firms paid out over $33 billion in bonuses, roughly the same amount as in 2006, even though 2007 brought us the first of a wave of credit losses and asset writedowns. The practice of handing out big bonuses has become a part of life for the top ranks of Wall Street, and has accelerated throughout the past decade. At top firms like Goldman Sachs and Morgan Stanley, nearly 50% of pre-tax profits goes toward compensation, far above the norm in every other sector of the economy. One would think that an economic Pearl Harbor would change all that, but so far change is hard to come by.

Former AIG chief Martin Sullivan, when he was let go (no, not fired) by the board in June of 2008, following over $20 billion in losses, took with him a pro-rated bonus of $4 million, along with $15 million in severance and other benefits, for a total walkout package worth over $45 million. (Learn more in Pages From The Bad CEO Playbook.)

Over at Citigroup, it was announced in March that five top executives would be receiving "retention payments" of over $12 million in 2010, based on performance goals from the prior year. Included in that five is James Forese, who oversees the Institutional Client Group, which lost $20 billion for its clients in 2008.

Silly Thain
Newly hired CEO John Thain of Merrill Lynch got a $15 million signing bonus in 2007, then presided over net losses exceeding $11 billion during the first three quarters of 2008. His response? Thain announced in December that he wanted a $10 million bonus, claiming that his snap decision to sell Merrill to Bank of America saved shareholders billions.

That didn't fly with shareholders and Merrill's board, who watched the stock fall from over $50 per share to $17, and it didn't sit very well with New York Attorney General Andrew Cuomo, who fired off a letter to Thain with the general tone of: "take that bonus, and I will come at you with everything I've got." Thain quietly announced to the board shortly after that he would not be taking a bonus. But fret not, for his compensation package could be worth north of $100 million over the next few years.

The same no-bonus sentiment was echoed by Goldman Sachs CEO Lloyd Blankfein and Morgan Stanley CEO John Mack, the heads of the last two investment banks left standing after the carnage of September 2008. Over at Goldman, the top six executives took no bonus in 2008, but for the firm's other 30,000 employees, over $10 billion in bonuses were doled out, including around $4 million each for the 440 Goldman partners. But don't be too flabbergasted; that's a sharp cut from the $12 million plus those partners got in 2007.

"But if we don't pay them, they'll leave!"
This is the prevailing argument given by Wall Street managers. That bonuses are key to getting top talent, and holding on to it once it's in the door. But that just doesn't pass the smell test. Over 200,000 financial jobs have been lost in the past year, many of them never to return. Where would this top talent defect to?

Given the size of these bonuses and the gumption that they were delivered at all last year, it's no surprise that Wall Street execs weren't on the Christmas card lists of regular Americans. Adding to the confusion (some would say the fury) is that Goldman, Merrill and seven other financial institutions received tens of billions in TARP bailout money. The size of Goldman's total bonus package was greater than the TARP funds it received, leading to the obvious question that if TARP funds hadn't been received, would those bonuses have been able to be paid?

Goldman says yes, and other financial firms have justified their bonuses under the banner of "we still made a profit". And to be fair, several firms including Goldman have repaid their TARP funds in 2009, with interest. TARP rules forbid the paying out of bonuses with TARP money, but one needs to merely glance over the balance sheet of any major financial institution to see that funds can quite easily be shuffled, mingled, and be shown to come from somewhere else.

Going Forward
But a larger question still looms. What are the incentives in place on Wall Street? Is what keeps an exec shooting for a multimillion bonus worth the potential for a blowup that costs the company and shareholders billions? Cash incentives for one year's production leaves out an important element - what that production does for the risk profile of the company going forward.

Parting Thoughts
Andrew Cuomo, Congress, the SEC, shareholder activists and the public at large all have a vested interest in seeing Wall Street become a more stable, conservative institution. While it's not fair to lambaste Wall Street as a whole, it's also not fair for a group to make more than NFL players and movie stars without providing anything of real value to the economy. What could be hazily justified in the past just couldn't fly in 2008. It's time for meaningful changes to the way financial executives are incentivized and paid. Several years of great growth followed by a soul-searching implosion doesn't just damage Wall Street, but all of us. (For more, read Executive Compensation: How Much Is Too Much? and Evaluating Executive Compensation.)