The big banks are pre-testing their main messages for bonus season, which starts in earnest next week. Their payouts relative to profits will be “record lows,” their people won’t make as much as in 2007 (except for Goldman), and they will pay a higher proportion of the bonus in stock than usual. Behind the scenes, leading executives are still arguing out the details of the optics.
As they justify their pay packages, the bankers open up a broader relevant question: How much bonus do they deserve in this situation? After all, bonus time is when you decide who made what kind of relative contribution to your bottom line--and you are able to recognize unusually strong achievement.
Seen in these terms, the answer is easy: People working at our largest banks--say over $100 billion in total assets--should get zero bonus for 2009.
The big bank executives make three points in favor of paying bonuses for 2009.
(1) If the bonuses are not paid, people will leave our major banks. It’s unlikely that many good people will leave, but if they do move to smaller institutions that are not Too Big To Fail, that’s good for the rest of us.
(2) Big banks made these profits fair-and-square, so the bonuses belong to the workforce. This is wrong at two levels (a) the profits in 2009 (and 2008) were solely the result of massive government intervention, designed at saving and recapitalizing big banks, and (b) the recapitalization part of that strategy only works if the profits generated are retained--not if they are paid out.
(3) You cannot now tax the bonuses for 2009 without violating all the norms of reasonable taxation--i.e., that it not be retroactive, not be confiscatory, and not mess seriously with incentives. Ordinarily, these are good arguments. But today’s circumstances are so egregious that we need to take highly unusual steps. The banks and their key employees are so far from understanding what they did wrong, they don’t even have a framework within which they can understand what they need to do right going forward. This industry needs a wake-up call.
The administration should immediately propose and the Congress must at once take up legislation to tax the individuals who receive bonuses from banks that were in the Too Big To Fail category--using receipt of the first round of TARP funds would be one fair criterion, but we could widen this to participation in the stress tests of 2009.
The supertax structure being implemented in the UK is definitely not the right model--these “taxes on bonuses” are being paid by the banks (i.e., their shareholders--meaning you, again) and not by the people receiving the bonuses.
Essentially, we need a steeply progressive windfall income tax--tied to the receipt of a particular form of income. This is tricky to design right--but a lot of good lawyers can get cranking.
And we should be honest about the distortionary effect that even proposing such legislation will have on incentives. It will send a signal that income generated by working at big banks is less secure--all employees of these banks should be looking over their shoulders; sooner or later, the Internal Revenue Service is coming. This is particularly relevant for 2010, which looks set to be another bumper year for the financial sector.
At this stage, tilting the playing field towards smaller participants in financial markets is not a bug, it’s a desperately needed feature.
[Cross-posted at The Baseline Scenario.]
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COMMENTS (13)
This is such a poor piece. It's like biting into a thistle... you don't know which part to spit out first.
1) Johnson fails to understand or identify the problem that needs to be solved. (I.e. an explicit government guarantee that encourages excessive risk taking, generates excessive profits, and leads to a mis-allocation of credit).
2) He proposes a solution which will not solve any problem other than a feel good temporary assuagement of misguided populist sentiments of envy and and unfairness.
3) The solution he proposes will not work. Bankers will simply develop devices to avoid the taxes (increased base salaries, preference share grants with dividends tied to profits, etc.). This is what th ... view full comment
This is such a poor piece. It's like biting into a thistle... you don't know which part to spit out first.
1) Johnson fails to understand or identify the problem that needs to be solved. (I.e. an explicit government guarantee that encourages excessive risk taking, generates excessive profits, and leads to a mis-allocation of credit).
2) He proposes a solution which will not solve any problem other than a feel good temporary assuagement of misguided populist sentiments of envy and and unfairness.
3) The solution he proposes will not work. Bankers will simply develop devices to avoid the taxes (increased base salaries, preference share grants with dividends tied to profits, etc.). This is what the bankers are really good at doing.
4) The proposed solution (if it did work, which it won't) will exacerbate the problem by incentivizing bankers to compensate for the "tax" by engaging in higher risk / higher return activities, and it does nothing to address the mis-allocation of credit.
TNR Editors - Please quit publishing this kind of crap. It is intellectually offensive to anyone who has even a modest understanding of banking, finance, economics and human nature. The financial system has serious problems that need to be fixed. The garbage you are publishing is infantile and a complete distraction.
Simon, you need a better argument. If union fork lift drivers with a 10th grade education education are pulling down $70K in salary + benefits, then how much do you think a guy that is in the top 0.1% of producers is worth? A guy that busted ass and graduated at the top of his class in high school, college and earned an MBA from a prestigious school? Do you really think he's only worth 10X more than the fork lift driver with a 10th grade education?
There are roughly 50 public CEOs that make more than $20M. We as a society have determined that a kid with an 8th grade education that can barely speak english and cannot even perform at 8th grade math is worth $20M per year. It's called the NBA.
Sp ... view full comment
Simon, you need a better argument. If union fork lift drivers with a 10th grade education education are pulling down $70K in salary + benefits, then how much do you think a guy that is in the top 0.1% of producers is worth? A guy that busted ass and graduated at the top of his class in high school, college and earned an MBA from a prestigious school? Do you really think he's only worth 10X more than the fork lift driver with a 10th grade education?
There are roughly 50 public CEOs that make more than $20M. We as a society have determined that a kid with an 8th grade education that can barely speak english and cannot even perform at 8th grade math is worth $20M per year. It's called the NBA.
Spend some time worrying about the stuff that matters.
dtoh, good posting, I agree we have to bring back the regulations which the Clinton administration in its triangulation gutted. Citibank is fine, Citigroup is not. Keep Banks and investment houses separate.
As to the bonuses, at most we should name them and shame them, though I doubt in our shameless era that would have much effect.
Good lord Seattle, that was one of the most offensive pieces of garbage you have ever written.
And for someone who seems to think he is part of the intellectual elite, only an outright dumbass would write something so idiotic. I don't like to say this about any poster, but you are a real asshole. That crack about the NBA reveals far more about your gutter min ... view full comment
dtoh, good posting, I agree we have to bring back the regulations which the Clinton administration in its triangulation gutted. Citibank is fine, Citigroup is not. Keep Banks and investment houses separate.
As to the bonuses, at most we should name them and shame them, though I doubt in our shameless era that would have much effect.
Good lord Seattle, that was one of the most offensive pieces of garbage you have ever written.
And for someone who seems to think he is part of the intellectual elite, only an outright dumbass would write something so idiotic. I don't like to say this about any poster, but you are a real asshole. That crack about the NBA reveals far more about your gutter mind than you realize.
Why stop at banks? There are CEO’s getting bonuses in other industries that really piss me off. Food for example. Have you seen the movie Food Inc.? The way large food companies treat animals is cruel and disgusting. Let’s tax 100% of the bonuses of the slime-bag CEO’s of companies that get farm subsidies and make profits off cruelty to animals just so we can stuff our faces with Big Mac’s.
And speaking of Big Mac’s, I hate the fast food industry. The CEO’s in this industry put out a product that is known to lead to obesity and heart disease, which in turn results in billions of dollars of health care costs that we are all going to have to pay for. I say let’s tax 100 ... view full comment
Why stop at banks? There are CEO’s getting bonuses in other industries that really piss me off. Food for example. Have you seen the movie Food Inc.? The way large food companies treat animals is cruel and disgusting. Let’s tax 100% of the bonuses of the slime-bag CEO’s of companies that get farm subsidies and make profits off cruelty to animals just so we can stuff our faces with Big Mac’s.
And speaking of Big Mac’s, I hate the fast food industry. The CEO’s in this industry put out a product that is known to lead to obesity and heart disease, which in turn results in billions of dollars of health care costs that we are all going to have to pay for. I say let’s tax 100% of the bonuses of the CEO’s of any fast food company.
BTW, doth, excellent post.
Sorry, but all this taxing will not get the message across. This recession has not occasioned one murder of one banker, nor one measly riot by working class people or by people swindled by the thousands of bank workers. It amazes me that all the talk has been just that and not one banker has found themselves seriously injured or dead as a result. That's the only way the message can get across. We forget the riots of an earlier era when mobs lynched bankers for less. We've gone soft and don't really know any more how to show our anger, except to say, let's "shame them..." oooooh...
Sorry, but all this taxing will not get the message across. This recession has not occasioned one murder of one banker, nor one measly riot by working class people or by people swindled by the thousands of bank workers. It amazes me that all the talk has been just that and not one banker has found themselves seriously injured or dead as a result. That's the only way the message can get across. We forget the riots of an earlier era when mobs lynched bankers for less. We've gone soft and don't really know any more how to show our anger, except to say, let's "shame them..." oooooh...
blackton,
15-20% of our population is illiterate.
Did you find my comment offensive because you believe that the illiteracy rate in the well-paid NBA realm is the same as the CEO ranks? In other words, 0%? You’d be wrong.
Or is it offensive because you argue that all of the top 50 highest paid NBA players could easily solve an 8th grade algebra problem? You’d be wrong.
Is it because I singled out the NBA? Fine, consider the NHL instead. Hell, the NHL had a self-admitted illiterate coach. Or NFL for that matter. ESPN does stories on this stuff you know. I don’t have a unique angle on this.
Or is it offensive because you just don’t like the point?
Why is it OK if people buy tickets and re ... view full comment
blackton,
15-20% of our population is illiterate.
Did you find my comment offensive because you believe that the illiteracy rate in the well-paid NBA realm is the same as the CEO ranks? In other words, 0%? You’d be wrong.
Or is it offensive because you argue that all of the top 50 highest paid NBA players could easily solve an 8th grade algebra problem? You’d be wrong.
Is it because I singled out the NBA? Fine, consider the NHL instead. Hell, the NHL had a self-admitted illiterate coach. Or NFL for that matter. ESPN does stories on this stuff you know. I don’t have a unique angle on this.
Or is it offensive because you just don’t like the point?
Why is it OK if people buy tickets and reward an athlete with a $20M/year salary, regardless of performance, but it’s not OK for a CEO to finagle a $20M/year salary from his board? Again, there are only 50 public CEOs that are paid at these levels. There are more big lottery winners each year.
What is offensive is your punitive tone on pay. If you don’t like it, don’t buy the product. If you think Steve Jobs makes too much, don't buy his products. If the CEO’s pay is that burdensome, it will be reflected in the product cost and people won’t buy the product and the stock will tank. If someone, including CEO, unions and illiterate athletes and illiterate performers, can negotiate a great package in a free market, then I’m all for it.
Intellectual elite? Me? Hardly . I’m a product of slightly-better-than-mediocre public schools and put myself through college as a short order cook.
Seattle - Sorry to spoil your neat little view of the world, but outrageous CEO compensation is hardly the product of a "free market." More like a rigged market. In a true free market, shareholders - owners of the company, after all - would have the right to choose their own Board of Directors, as opposed to the current system where the CEO hand-picks the Board and the Compensation Committee. Shareholders are powerless. How is that free?
As far as protesting CEO pay by boycotting the product, good luck. CEO compensation levels generally bear no relation to the company's success or failure. Home Depot stock tanked when Bob Nardelli was CEO. Yet a friendly Board punished him with a $200M ... view full comment
Seattle - Sorry to spoil your neat little view of the world, but outrageous CEO compensation is hardly the product of a "free market." More like a rigged market. In a true free market, shareholders - owners of the company, after all - would have the right to choose their own Board of Directors, as opposed to the current system where the CEO hand-picks the Board and the Compensation Committee. Shareholders are powerless. How is that free?
As far as protesting CEO pay by boycotting the product, good luck. CEO compensation levels generally bear no relation to the company's success or failure. Home Depot stock tanked when Bob Nardelli was CEO. Yet a friendly Board punished him with a $200M+ severance.
Truth is, America is largely ruled by an unproductive and overcompensated elite of corporate CEOs, Wall Street croupiers who create nothing of value, and private equity shysters who acquire healthy companies, load them up with debt and lay off thousands to goose up the short-term stock price, then flip what's left for a profit.
Johnson's recommendations are spot on. Pity that they'll probably never get enacted.
Home Depot's sales doubled while he was CEO. When he came in it was the height of the bubble. The stock had no other place to go but down.
The board gave Nardelli the boot. They hired him, and they fired him. Most of that $200M was stock he already owned. The board gave him about $20M to get the hell out, and another similar chunk to not talk about his employment and not work for a competitor.
Pretty standard stuff.
CEOs are generally very influential people able to get folks to try their ideas. They are paid to be bold. Nobody hires a CEO to keep doing what they are doing. The company can do that by itself.
How much is the CEO worth that said to his team in 2003: "We will NOT participate in ... view full comment
Home Depot's sales doubled while he was CEO. When he came in it was the height of the bubble. The stock had no other place to go but down.
The board gave Nardelli the boot. They hired him, and they fired him. Most of that $200M was stock he already owned. The board gave him about $20M to get the hell out, and another similar chunk to not talk about his employment and not work for a competitor.
Pretty standard stuff.
CEOs are generally very influential people able to get folks to try their ideas. They are paid to be bold. Nobody hires a CEO to keep doing what they are doing. The company can do that by itself.
How much is the CEO worth that said to his team in 2003: "We will NOT participate in this subprime mess. I know the sales teams are going to scream, because banks are making a fortune on these shoddy loans. But I will not subject our company to this risk".
Is he worth $1B a year? Easily. In 2007 was he worth $1B a year? That'd be a hard sell, because nobody could properly value his cautious stance and other banks were very likely outperforming his bank becasue they HAD participated in the subprime mess.
The moral here is that you will never understand another man's business unless you are in that business. Becoming CEO means you have bested thousands of people. Morons do not become CEOs. Sometime their plans work. Many times they do not.
But screwing with the pay of a private entity is moronic. If they take TARP, fine. Make that part of the deal. Whack them hard for loaning them the money. But if they haven't taken tarp and they aren't a monopoly, then it's a private matter for shareholders.
And since CEO pay never really harms shareholders by more than a %, you'll have a tough time getting shareholders wound up enough.
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It is clear that bank executive bonuses are not the core of the problem. But I think what Blackton was reacting to is the implication that a person's educational level or intelligence, rather than productivity, should determine the level at which one is compensated. Setting aside Home Depot and other companies not in the banking industry, the financial sector is not producing anything, not even loans. Fork-lift drivers assist in prodcuing and distributing products for which their is consumer demand. Even more so, professional athletes produce a product for which there is intense consumer demand. While some basketball players may be "illiterate," their skill level at playing basketbal ... view full comment
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It is clear that bank executive bonuses are not the core of the problem. But I think what Blackton was reacting to is the implication that a person's educational level or intelligence, rather than productivity, should determine the level at which one is compensated. Setting aside Home Depot and other companies not in the banking industry, the financial sector is not producing anything, not even loans. Fork-lift drivers assist in prodcuing and distributing products for which their is consumer demand. Even more so, professional athletes produce a product for which there is intense consumer demand. While some basketball players may be "illiterate," their skill level at playing basketball is hundreds of times greater than that of any bank CEO that I know of. The point is that compensation should be pegged to productivity, not credentials.
dhurtado, do you really believe the banks produce nothing? Somehow they have convinced all these people to give them money for nothing? You think that a group of smart people might show up and offer to do "nothing" for half price and clean up? Your argument defies logic. It's kind of like the mantra that an all electric car with 300 mile range for $15,000 is possible, except GM won't build it. Yeah right.
As I noted, I have no problem with anyone negotiating whatever they are able to negotiate in a free market. Entertainers, CEOs, footballers, assembly line workers.
There are about 100 entertainers in this country that make more than $10M/year. There are about 100 sports figures that make mo ... view full comment
dhurtado, do you really believe the banks produce nothing? Somehow they have convinced all these people to give them money for nothing? You think that a group of smart people might show up and offer to do "nothing" for half price and clean up? Your argument defies logic. It's kind of like the mantra that an all electric car with 300 mile range for $15,000 is possible, except GM won't build it. Yeah right.
As I noted, I have no problem with anyone negotiating whatever they are able to negotiate in a free market. Entertainers, CEOs, footballers, assembly line workers.
There are about 100 entertainers in this country that make more than $10M/year. There are about 100 sports figures that make more than $10M/year. There are about 100 CEOs that make more than $10M a year. The point I was trying to make was that the bball player and the CEO both had gone through a rigorous filtering and screening process. Both had bested thousands of competitors and ended up on top. Both are paid huge salaries. Both sometimes help and sometimes hurt the organization. How is the baller any different from a CEO? Except that, overwhelmingly, the baller isn’t able to solve an 8th grade math question. Offensive? Why? The CEO can’t dunk. Is that offensive?
These people are the top of the top. They have skills that have combined with hard work and luck have gotten where they are today. (FWIW, there are about 50 people a year that win more than $10M in a mega lottery. They’ve done nothing special, except buy a ticket). This is all very, very rarified air. Why care about the salary of the CEO, but not the NBA, NHL or NFL players? Jealousy? Envy? Your own private greed? Hate?
Setting salaries and bonus limits is ridiculously complicated, and utterly outside the scope of government competency. Consider Countrywide in 2007. They had, what, 30+?% exposure to subprimes, were posting great numbers, and getting poor people into houses at a crazy rate. A person like Dodd or Frank probably wouldn’t have rated their performance as “outstanding” and “exemplary” in 2007.
Consider ING which in 2007 had less than 2% subprime exposure. They weren’t posting anywhere near what Countrywide was posting on performance and/or returns. They hadn’t loaned nearly as much to those with crappy credit scores. Do you think Dodd and Frank were really impressed with them? Would they rate their performance as “high”? Was ING being fair to the shareholder? Fair to poor borrowers? In 2007, they would have been punished by the government. In 2009, we must look back with 20/20 hindsight and say their CEO is probably worth $1B because he helped them avoid countless billions in bad loans.
You really think our government is capable of rating something this complex over their 2 to 6 year office term? Sure they will try. But it is and should be a matter for boards and shareholders. Now, if you take tarp money and agree to it up front, OK. But retroactively deciding this and threatening future bonuses is total crap.
When the government gets to decide these things, it becomes yet another tool the government uses to reward friends. Don’t you just love how unions will be exempted from the tax on big health care plans? That was just announced today. Favors for friends.
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You'll note that I haven't complained about the high salaries or endorsed government regulation of salaries. I will note, however, that what is being discussed here is bonuses, not salaries, which by definition are supposed to be backward-looking;in other words, to reward peformance/production in retrospect. If a private bank (and its sharelholders) want to reward a CEO for leading it into insolvency, that's OK by me. But when a bank executive leads a financial institution to the brink of insolvency, which is avoided only with a large public subsidy, then I think the public has every right to deny or cap bonuses. But I would agree that, in the overall scheme of things, it is more a ma ... view full comment
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You'll note that I haven't complained about the high salaries or endorsed government regulation of salaries. I will note, however, that what is being discussed here is bonuses, not salaries, which by definition are supposed to be backward-looking;in other words, to reward peformance/production in retrospect. If a private bank (and its sharelholders) want to reward a CEO for leading it into insolvency, that's OK by me. But when a bank executive leads a financial institution to the brink of insolvency, which is avoided only with a large public subsidy, then I think the public has every right to deny or cap bonuses. But I would agree that, in the overall scheme of things, it is more a matter of optics than substance.
But my comment was directed to your implied assertion that a bank CEO deserves to make more money than a fork-lift driver or a pro basketball player, irrespective of productivity, because the former is highly literate and the latter is not. You apparently have now backed off of that assertion:
"There are about 100 entertainers in this country that make more than $10M/year. There are about 100 sports figures that make more than $10M/year. There are about 100 CEOs that make more than $10M a year. The point I was trying to make was that the bball player and the CEO both had gone through a rigorous filtering and screening process. Both had bested thousands of competitors and ended up on top. Both are paid huge salaries. Both sometimes help and sometimes hurt the organization. How is the baller any different from a CEO? Except that, overwhelmingly, the baller isn’t able to solve an 8th grade math question. Offensive? Why? The CEO can’t dunk. Is that offensive?"
But it is offensive you think this is parallelism in the following proposition: The majority of bball players have an 8th grade literacy level/CEOs can't dunk. First, the former statement is not demonstrably true, and you should not say it if you cannot factually support it. Second, by any standard, the statement that bballers are generally illiterate is offensive, whereas no one would be offended by the statement that a banker can't dunk (which in itself grossly minimizes the level of skill -- and intelligence -- that is required to perform well in professional sports).
dhurtado, the CEO cannot always control externals, and everywhere I've worked it's possible for any employee to get a bonus if the met less than their personal goals IF externals came into play. If a paper salesmen had a goal to increase sales 25%, and then the economy tanked and you only increased it by 4%, the manager might look around and say "Gee, everyone had sales *drop* by 10%, so Jenkins, you did a really good job and here's almost all your bonus".
If the home depot CEO was goaled on increasing sales, then he succeed fabulously during his tenure. If he was goaled on driving up stock price, then the failed. But again, we don't know his review goals. It's a matter for him and the board.
... view full comment
dhurtado, the CEO cannot always control externals, and everywhere I've worked it's possible for any employee to get a bonus if the met less than their personal goals IF externals came into play. If a paper salesmen had a goal to increase sales 25%, and then the economy tanked and you only increased it by 4%, the manager might look around and say "Gee, everyone had sales *drop* by 10%, so Jenkins, you did a really good job and here's almost all your bonus".
If the home depot CEO was goaled on increasing sales, then he succeed fabulously during his tenure. If he was goaled on driving up stock price, then the failed. But again, we don't know his review goals. It's a matter for him and the board.
Now, the "big banks" were buying what they thought was AAA from Fannie and Freddie. If F & F were selling these dicey mortgages as AAA prime when in fact they were far below that, why fault the banks for this?
http://online.wsj.com/article/SB2000142405274870327860457462468187342757...
Now, if someone voluntarily takes tarp because they are in big trouble, then great. A part of that emergency loan can be whatever terms the government wants. But if someone is FORCED to take tarp, and then after they take it a crap load of extra conditions are heaped up them, then I have a problem with that.
If you think 50% of NBA/NFL players can solve an 8th grade algebra equation, you are nuts. Half the general population cannot solve one. I'll concede that half the NBA/NFL/NHL probably isn't illiterate--I was being hyperbolic. But I suspect it is fairly close the the 20% mark of illiteracy that the general population experiences. Articles are written every year about players that graduate from college unable to read. They were passed along by every teacher as a courtesy to "the program".
Well, everywhere I have worked bonuses were given only if: (1) the company's profitability justified it; and/or (2) the employee him- or herself was personally responsible for generating extaordinary revenue. I am not aware of anyone receiving a bonus when the company was unprofitable or the employee did not meet his or her goals simply because the failure was attributable to "externatlities." Maybe it does not work that way in the banking industry. But, be that as it may, I have not really heard anyone dispute that the executives of the banks in question contributed to the bank crisis that you refer to as an externality. In any event, I would not favor limiting bonuses other than for ba ... view full comment
Well, everywhere I have worked bonuses were given only if: (1) the company's profitability justified it; and/or (2) the employee him- or herself was personally responsible for generating extaordinary revenue. I am not aware of anyone receiving a bonus when the company was unprofitable or the employee did not meet his or her goals simply because the failure was attributable to "externatlities." Maybe it does not work that way in the banking industry. But, be that as it may, I have not really heard anyone dispute that the executives of the banks in question contributed to the bank crisis that you refer to as an externality. In any event, I would not favor limiting bonuses other than for banks that voluntarily took TARP money. (Was as anyone "forced" to take TARP money?) So we are pretty much on the same page there.
With regard to the literacy question, I phrased it as "8th-grade literacy level" rather than ability to "solve an 8th-grade algebra equation' precisely because, as you acknowlege, the latter is not a meaningful metric in this context because the fact that some high percentage of bball players could not solve an 8th-grade algebra equation does not distinguish bballers from the general population. I have a law degree and I probably could not solve an 8th grade algebra equation (I have been away from it for too long). Even with respect to general illiteracy, your (unsupported hypothesis) is only that the illiteracy level among professional athletes is the same as that of the general population. But the ultimate question is -- so what? If an illiterate person is able to produce something for which there is a high consumer demand, why wouldn't they deserve every penny that they earn?