I Was an Evil Investment Banker

It's true. I was a real, live investment banker. And while that used to be a source of pride for many financial professionals, the media today has made investment bankers seem more like something that crawled up from the pits of Hades.

There are some very valid reasons for citizens' outrage against the banking sector. Though financial institutions have been banging down the government's door to give them handouts, they still managed to find loose change in their collective purses to pay out $18 billion in bonuses for 2008. The specific case of Merrill Lynch and its rushed bonus payouts under John Thain has garnered extra attention, as that firm crumbles under the new ownership of Bank of America (NYSE: BAC  ) .

But before you grab the pitchforks ...
The term "investment banker" -- or just "banker" -- itself is a pretty broad brush. It tends to cover everyone who works at an investment bank, from Goldman Sachs (NYSE: GS  ) to the investment banking arms of Citigroup (NYSE: C  ) or Bank of America. However, these firms contain a host of different roles. Various employees make large trades for institutional clients, structure collateralized debt, advise on mergers, trade on the firm's account, maintain and improve the firm's technology infrastructure, run private equity funds, and many more such jobs.

In an industry that can see unbelievable revenue production from small numbers of employees, would it really be in the banks' best interest to tick off their best people by cutting out the potential for big bonus payouts? Let's consider a few realistic (though not necessarily real) examples:

Scenario A
A group within JPMorgan's (NYSE: JPM  ) technology division completes a massive overhaul of the bank's data centers. This overhaul will not only improve the security of the data centers, but also reduce the power draw, increase speed, and reduce the manpower needed to maintain it on a day-to-day basis. The project will potentially save JPMorgan tens of millions of dollars in overhead. Does this team deserve bonuses?

Scenario B
A sales-trader at Goldman Sachs has doubled her account list over the past year, landing huge trades from a handful of big-name clients. Her trading volume is up by leaps and bounds, generating a lot of trading fees for Goldman. This trader's clients trust her and her execution ability, and they would likely follow her to another bank. Would you give her a bonus?

Scenario C
M&A teams at Morgan Stanley (NYSE: MS  ) and Bank of America land a massive deal during a tough time – hypothetically, a $68 billion deal for a client whose name rhymes with Pfizer (NYSE: PFE  ) . The deal generates hundreds of millions of dollars in fees for the two banks, all thanks to a handful of core people from each company. Each bank's main banker landed the deal because of a good relationship with the folks at Pfizer and Wyeth. No bonuses here?

Personally, I can't speak to the specifics of the tech groups at the big banks or the traders, but having actually worked on M&A deals, I know that the bankers working on that Pfizer-Wyeth deal haven't done much sleeping for a while. Heck, their families may have started to forget what they look like. It's not a fun lifestyle (a major reason why I was an investment banker), but it does promise big bonuses – in exchange for a lot of 100-hour weeks and a little bit of luck.

The trick is how to pay
Bonuses aren't anything new. They've been motivating salespeople in just about every industry for a long, long time. They're the epitome of rewarding employees based on merit, and I think it would be a big mistake for the government or anybody else to push Wall Street to guillotine the bonus as an incentive tool.

But in many cases, Wall Street has botched what it means to deserve a bonus. The examples above are all instances where the banks collect fees (or reduce expenses) with no further future exposure to loss. But as we have seen all too well, there are plenty of similar businesses within banks and investment banks that potentially expose the bank to huge losses down the road. It would be fairer to compensate employees based on the eventual outcome, rather than the transaction or the initial fee. That setup would also change the whole incentive structure, encouraging employees to do what's right for the long term, not just for today.

In a similar way, C-level executive pay has been little more than a "heads I win, tails I also win" proposition. Merrill Lynch's former boss Stan O'Neal was a perfect example of this, walking away from a firm that he helped drive into the ground with far more than $100 million. It's troubling to say that the heads of hedge funds are more responsible, and more beholden to their shareholders, than the CEOs of our major financial institutions, but at least hedge fund bosses face compensation clawbacks if their performance tanks.

I'm not an investment banker ...
... but maybe I'm still drinking the investment banking Kool-Aid. Maybe the services that bankers provide really aren't worth the hundreds of millions that they get paid. But if, as a country, we still want to at least pay lip service to capitalism, I don't see how we can cry foul when employees who singlehandedly make millions for their companies take home a fat paycheck. There's a lot of work that needs to be done on Wall Street, but come on! Put the pitchforks down, back away from the tar and feathers, and let's do this the right way.

A bonus helping of Foolishness:

Pfizer and JPMorgan Chase are Motley Fool Income Investor picks. Pfizer is a Motley Fool Inside Value recommendation. The Fool owns shares of Pfizer. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Matt Koppenheffer owns shares of Bank of America, but does not own shares of any of the other companies mentioned. Bank of America is a former Motley Fool Income Investor pick. The Fool's disclosure policy has never once been caught with its pants down. Of course, it doesn't actually wear pants ...


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  • Report this Comment On February 06, 2009, at 3:23 PM, dividendgrowth wrote:

    This article is trash, and WS apologists are shameless.

    Since salary cap was introduced in the NFL, we've seen only better games.

    Now it's time to reign in executive compensations, everywhere! The greed must end.

  • Report this Comment On February 06, 2009, at 4:16 PM, TMFKopp wrote:

    @dividendgrowth

    Thanks for the comment.

    Do you really think the NFL salary cap is a good basis for comparison here?

    Having the government step in and cap compensation, particularly for non-executive employees is an awful idea. If a compensation cap needs to be implemented, shareholders need to step up and demand it.

    Of course this probably won't happen. Why? Because most GS and MS shareholders know enough that they don't want to chase away their best bankers, traders, and asset managers.

  • Report this Comment On February 06, 2009, at 4:35 PM, Dentoy wrote:

    While I don't necessarily disagree with the idea that lower level valued employees should not be painted with the same brush there is a problem.

    IF THEY NEED TAXPAYER MONEY IN ORDER TO EXIST THEN THE "GAME" OVERALL HAS CHANGED DRAMATICALLY.

    Shouldn't there be both a "carrot" and a "stick"?

    Acceptance of taxpayer money needs to carry some kind of "penalty" in order to motivate the company to give the taxpayer their money back. Then they can get on with their "party".

    Maybe not all bonuses should be eliminated, but how do you incentivise private entities to give back the public money they have received as quickly as humanly possible.?

    NO PUBLIC MONEY THEY CAN DO WHAT THEY WANT.

  • Report this Comment On February 06, 2009, at 4:39 PM, difranr wrote:

    I do think you are still drinking the Investment Banker Kool-Aid.

    I agree that the people in those example should see some of the benefit of their hard work. I just think that the numbers that are thrown out on Wall Street are so far out of whack with Main Street America.

    In my mind, that part of anyone's JOB that works for a PUBLIC corporation is to make [or save] money for the SHAREHOLDER's and not necessarily for the individual.

  • Report this Comment On February 06, 2009, at 4:56 PM, djemonk wrote:

    Scenario A: They wouldn't be getting more than $500K bonuses.

    Scenario B & C: The traders and bankers in question should NOT receive bonuses. The firms that made these bad bets were BAILED OUT. They were not promised that they'd be able to keep their best people and clients. These firms deserve to lose those people to other banks that did not participate in short-sighted, unsafe investments that are costing the US taxpayers hundreds of billions of dollars ... dollars that we will be paying off for decades.

    This is the most shameful article I've ever seen on the Motley Fool. I am seriously contemplating canceling my newsletter subscriptions because of this. I'm embarrassed to even have an account on the same website as this article.

    It was difficult to craft a response to this article that did not sound like a transcript of the Christian Bale f-bomb extravaganza.

  • Report this Comment On February 06, 2009, at 5:04 PM, geeraf wrote:

    The whole basis for compensation is corrupt. Why not pay people a competitive wage and make the bonus a smaller percentage of the earnings. The bonus system engendered abuse of top to bottom.

  • Report this Comment On February 06, 2009, at 5:11 PM, djemonk wrote:

    <i>Scenario B & C: The traders and bankers in question should NOT receive bonuses.</i>

    I mean "excessive" bonuses. If they're capped at $500K, my heart does not really go out to these people or their employers.

    I seriously can't believe this article was even written. To suggest that a company that, by all rights, should have failed and failed spectacularly should be allowed to continue to pay out billions of taxpayer dollars as bonuses and then use the principles of capitalism to defend that position is just ... there are no words. It's the intellectual equivalent of a hate crime.

    I reread the article and I'm simply stupefied that the Motley Fool would have considered this a reasonable thing to post. I'm stunned.

  • Report this Comment On February 06, 2009, at 5:19 PM, jettrey wrote:

    "But if, as a country, we still want to at least pay lip service to capitalism" then there'd be no government bailout, the bank would fail and the profitable parts of it, including employees, would likely be absorbed by other banks that manage risk better.

    Not saying if that's good or bad, but I couldn't believe you tried to use "capitalism" in your argument.

  • Report this Comment On February 06, 2009, at 5:32 PM, a65fc wrote:

    "Heck, their families may have started to forget what they look like."

    ... As have the families of people working two jobs for a lot less just ot put food on the table and a roof over their heads.

    So if B and C aren't given bonuses, they'll move to another firm? Wouldn't the other firms have bonus caps as well?

    Would B and C give up "only" $500,000 bonuses on top of salary out of disgust and leave the financial industry to work for a whole heck of a lot less in another industry? Doubtful.

    Sorry Matt, this is the whole entitlement attitude that pisses everyone else off to no end. Hecse, the pitchforks.

  • Report this Comment On February 06, 2009, at 5:48 PM, Big50Shooter wrote:

    Easy all... Matt means well...

    I some degree I agree with him, HOWEVER, when public money comes into play, a lot of his philosophy goes out the window with the baby and the bathwater....

    In scenario A, sure that GROUP deserves somewhat of a bonus for the good work, but what SIZE bonus? Just because they may have (hypothetically) saved millions, that doesn't mean that anybody should be taking that savings home with them, team members OR their bosses... How about an additional 10% of THE TEAM MEMBERS salary for the good work (what would that be? $10k-$30K/person? I don't know what a base salary for these types even is???)...

    Scenario B; similar answer to the above... Maybe a nice percentage of HER salary for a bonus, or 2% to 4% of HER additional sales that she brought to the company for the year... BUT that also would not equate into multiple hundreds of thousands or more I would venture.. Also, on taking her clients with her, probably wouldn't be possible as I (her boss) would have made her sign a non-competition clause when she was hired on...

    Scenario C; again, I am SURE that the folks that had the ability to work/score such a BIG deal were fairly hansomly paid to start with. So, an additional percentage of their salary, or a small percentage of the profits the deal brought might be in order. But even if their deal made $200million, those teams would only be SHARING roughly $4million (2%) as a bonus... How many individuals are we talking here, 10? 20? 50? I have no idea, but there again, because the company made an additional 200 million (or so) doesn't mean that it should ALL be going home with that team OR their bosses....

    These board members/CEO's for these huge entities already receive pretty substancial paychecks in their positions, and considering the failure of all of these companies now, it's ludacris to think that ANY bonus' are in order for them. Involve governemtn bailout money, and we should be looking for bonus REFUNDS from these types....

  • Report this Comment On February 06, 2009, at 6:03 PM, TMFKopp wrote:

    @difranr

    "In my mind, that part of anyone's JOB that works for a PUBLIC corporation is to make [or save] money for the SHAREHOLDER's and not necessarily for the individual."

    Let's go with a hypothetical here. You're a major GS shareholder and the board comes to you and says, "hey we can get Johnny Superbanker on board for a $300k salary, but he wants 15% of the deal fees that he brings in."

    Last year Johnny Superbanker brought home $50m in fees at Lazard. What do you say? Do you balk at the potential $7.8m payday for Johnny and potentially lose $50m in fees?

    I'm signing his contract on the spot...

    @djemonk

    "The traders and bankers in question should NOT receive bonuses. The firms that made these bad bets were BAILED OUT. They were not promised that they'd be able to keep their best people and clients."

    First of all, a lot of the bonus capping talk has extended outside of just the firms that have received bailout money.

    But even if we're just talking about the firms that did receive bailout money your thoughts are a bit shortsighted. As a taxpayer, I want to see these firms get back on their feet as quickly as possible so that they can get back to business and pay back that TARP money. Dooming them to lose their best people almost ensures that taxpayers will be holding preferred stock in companies with subpar employees.

    @a65fc

    "... As have the families of people working two jobs for a lot less just ot put food on the table and a roof over their heads."

    I know that there are a lot of very hard working people out there, but the simple fact is that those people aren't instrumental in bringing in millions of dollars in revenue for their employers. I admire everyone working their tail off, but there are simply different levels of value creation in different jobs.

  • Report this Comment On February 06, 2009, at 6:21 PM, TMFKopp wrote:

    @Big50Shooter

    "I some degree I agree with him, HOWEVER, when public money comes into play, a lot of his philosophy goes out the window with the baby and the bathwater...."

    Does it? It sounds like you are somewhat on the same page as me, but as I noted above, I don't think we want to force the TARP-taking banks to lose their best employees. That DOESN'T mean paying the top executives huge bonuses for keeping the bank alive (I think executive bonuses should be reserved for firms making a profit that don't need government assistance). But it does mean making sure that these banks have the ability to pay their top producers what they need to pay them to keep them around.

    And if we keep all TARP-taking banks from paying big bonuses? The top people will go to non-TARP competitors and snag their business. What if we prevent all publicly held financial institutions from paying big bonuses? Well they'll go to, or start their own, private partnership. Prevent all financial institutions public and private from paying big bonuses? I'm not sure I like where this is going...

    I think some of the issue here is with the sheer amount of money that financial institutions get paid for their services. If clients didn't pay huge sums of money for the services there wouldn't be any financial company that would pay a massive bonus -- but it seems that clients think the banks' services are worth a bundle. As long as that's the case, I think big bonuses to big fee earners are warranted.

    And while I don't think the NFL is really a good point of comparison here (men playing sports for a living versus business men), USA today reports that Peyton Manning's payout for 2008 was $18.7 million (http://content.usatoday.com/sports/football/nfl/salaries/pla.... And that's based on perceived value that he brings to the table (upping team quality and bringing in fans) versus the very quantifiable fee income that financial services employees can demonstrate. And we feel it necessary to cap financial services bonuses at $500k? Really?

    Matt

  • Report this Comment On February 06, 2009, at 8:26 PM, 7footmoose wrote:

    the idea that one individual is singularly responsible for millions of dollars of revenue is bogus, large corporate relationships are not portable, anyone who believes this is hallucinating or is working for an institution which deserves to dry up and blow away, if a banker is doing the job they are being paid to do they are selling the capability of an institution to satisfy the needs of a client, if they are developing a portable relationship they are selling an ignorant client on the idea that they and they alone are capable of solving their financial problems, pay for performance is good pay for putting in hours is a waste

  • Report this Comment On February 06, 2009, at 9:15 PM, TMFKopp wrote:

    @7footmoose

    "the idea that one individual is singularly responsible for millions of dollars of revenue is bogus"

    I'm curious 7foot, is this out of experience or is this a personal belief?

    To step into a different part of the finance field, who would you say is behind the huge performance of Paulson & Co., Harbinger Capital, or Renaissance Technologies? Or heck... how about Berkshire Hathaway?

  • Report this Comment On February 06, 2009, at 9:41 PM, jettrey wrote:

    Okay, so I have to ask then, if the institutions in question are making so many lucrative deals justifying high dollar bonuses, then why are they in need of a bailout?

  • Report this Comment On February 06, 2009, at 9:52 PM, TMFKopp wrote:

    @jettrey

    Citigroup, as one example, employs over 350,000 in many different business lines. There are some businesses within Citi that have produced spectacular losses, while others have done well.

  • Report this Comment On February 06, 2009, at 10:28 PM, rjohnson10 wrote:

    That article is ludicrous. Those people deserve salaries, high paying salaries in many cases. When the companies do well, give out the bonuses. When the company does poorly, cut the bonuses. When the company does so poorly it would fold without taxpayer money, bonuses are right out the window and yes salaries should be limited til the government gets paid back.

    The talented folks can leave and start their own companies where they can get payed whatever they want. They'll attract customers, investors and hire 100's or 1000's of people and help rebuild this economy.

  • Report this Comment On February 06, 2009, at 10:52 PM, nin4086 wrote:

    @TMFkopp

    Good job with this article and responding to comments. I am full of anger too like the others who have posted comments, but we "shouldn't throw the baby out with the bathwater". Executives of ill-performing BUs should not get any bonuses: infact they should be fired! But others who did well, should certainly be given bonuses if we, taxpayers, have to recoup our investment (although I would not have made this investment if I had the power to do so).

    Re: compensation caps -- I believe that wealth and compensation caps at reasonable levels(I'll say that a billion dollars wealth cap is reasonable today) are good. There are more than enough "talented" people in the world so I am not worried about this deterring the capitalist machinery. Such a cap does serve to limit greed and "closed elite group" deals that are primariiy responsible for the sad state today.

  • Report this Comment On February 06, 2009, at 11:04 PM, PoundMutt wrote:

    When I was working bonuses were given out when profits were good, but NO bonuses in bad times.

    However, bonuses were 10% or so of our salaries, NEVER 100% or more! If performance is so poor a taxpayer bailout is necessary, part of those HUGH salaries SHOULD BE GIVEN BACK to the company!

  • Report this Comment On February 07, 2009, at 12:37 AM, mattdwright wrote:

    @TMFKopp

    I'm interested to hear you expand on this: "It would be fairer to compensate employees based on the eventual outcome, rather than the transaction or the initial fee. That setup would also change the whole incentive structure, encouraging employees to do what's right for the long term, not just for today."

    Any practical ideas?

  • Report this Comment On February 07, 2009, at 1:34 AM, skyprince wrote:

    Kudos to TMFKopp for all the insightful replies to above notes. There is obviously a lot of strong feeling on this issue of compensation...and for good reason. My issue is that Matt's article implies that other industries don't work as intelligently or as hard as investment bankers to facilitate profits...but they do. And let's face it...Wall Street got drunk on greed. Unrealistic deals were made, and huge fees exchanged hands...and the money was so good, everyone rationalized it one way or another, but in the dark recesses on their minds they knew many of these deals were flawed and that they were lacking in terms of appropriate risk management. Everyone was doing it and big bucks exchanged hands. I'm sure mobsters work hard at times too, but that doesn't make what they do okay. Bad comparison perhaps, but you get the point. I can't let you guys off that easily.

    Employees will work hard and smart for more than money. They love the challenge, the people, and other aspects of the job. They don't need huge bonuses....especially now that it is truly a buyer's market.

    Lastly, although many parties play a part in this economic tsunami--from unqualified home buyers, to ethically challenged mortgage brokers, appraisers, rating agencies, banks, Congress, and investment bankers, the latter played a particularly insideous role in creating, packaging, and marketing all the wonderful securitization BOMBS that are now blowing up all over the landscape...and they made more money doing it than any other party to this mess. Sorry...no compassion or sympathy here. We are now all going to pay a very heavy price for this party. The hangover is going to be a doozy.

  • Report this Comment On February 07, 2009, at 1:43 AM, petertsmith wrote:

    Sorry... Way too much KoolAide.

    For 98% of the folks at TARP aided outfits, the reality is much closer to "TARP=no bonus + pay cut" vs. "NoTARP = unemployment". Last I heard, layoffs were still rampant.

    Assuming the 2% that can walk through any door aren't part of the instant gratification crowd (chances are they are, which is why we're in this mess to begin with?), one merely needs to provide some encouragement to get "us" out from under TARP, and the bonus's will be better than ever. (As if either a Bank or a banker could look that far out?). Of course, getting out from under the Government's thumb probably isn't trivial.

  • Report this Comment On February 07, 2009, at 9:07 AM, riverfred wrote:

    Excuse me but don't these employess make hugh commissions on their sales without bonuses. What was their average pay, something like a $150,000 per year.

    I once recall a stock broker talking in the gym about the pigeons he suckered in to buying a stock that his company was promoting. I never forgot that.

  • Report this Comment On February 07, 2009, at 11:37 AM, JoeDeanPhipps wrote:

    I haven't taken the time to read other, previous, comments to Mr Koppenheffer's column, so what I say may be a repeat of other comments already made. If so, I apologize. I have "old time, previous, personal experience" in the "banking atmosphere" that he describes in this column. So, I understand his comments...and sympathize with those who "performed" in their jobs within the firm, but were part of an organization whose LEADERSHIP...or OTHERS in the organization...LOST much, much, more money, in what they were doing (or caused such loss)...than good performers made...or saved...the firm. ANY bonuses paid by public companies...and their size...must be tied to BOTH the performance of individuals AND overall financial results of the firm. If the firm LOSES money because of the incompetence or poor performance of top management and/or others in the firm...no matter how much "good" another individual or individuals did...no matter how much money he or she made or saved the firm...he or she cannot be paid a bonus. It is a TERRIBLE problem...I'll admit. I know, because I was on the "losing end" of such a situation a few times...I was a "good performer" in a firm whose leadership and others were irresponsible, poor performers (even dishonest) and caused the firm, overall, to LOSE money. An individual finds himself or herself having made a "bad bet" on who to choose to work for, in such a situation. But, it cannot be any other way. We, as a society and an economy, must NOT allow management and employees of public companies...OR those who seek and receive government funding to "save" themselves, or recapitalize themselves...to be paid exhorbitant bonuses or "above salary" compensation, no matter how outstanding are the individual performances, if the firm loses money. It is just NOT RIGHT (use any term you like..."good public policy", etc.). It is a terrible blow to those honest, hard working, and outstanding performers in firms, but unfortunately, they chose to work for management or with fellow employees who had bad judgment, did not "get it", were too greedy, did not take proper precautions against risk, had little or no integrity, etc., etc.,and cause considerable pain (and worse) for others. These people did a really unconscionable thing...they broke trust with those whom they employed, and/or with fellow workers...and/or they took actions that they simply should not (by many measures) have taken. That is one of the biggest problems of this current world-wide financial mess that we are in, and one of the most sweeping "reforms" that needs to be enacted, in its aftermath. Productive people SHOULD be rewarded with bonuses if they provide special performance. But they can only be rewarded in such a manner IF the firm also performs in similar exceptional ways. Strong and clear regulatory guidelines, administered effectively by people of integrity, and with internal policies and procedures laid out clearly in each firm, should be established. In doing so, eventually, poor management or those without integrity, will go by the wayside. Their organizations will cease to be top performers because good, productive people will choose NOT to work for them, or with them...and such firms will also diminish or go by the wayside. This is a complicated subject and much more could be said and a lot is left out of my comments...but I wanted to record a response to this (subject) column.

  • Report this Comment On February 07, 2009, at 11:57 AM, Tastylunch wrote:

    It's not that they took home fat checks, wall street used ot be about you east what you kill. That is fine

    What's wrong It's that they

    A) feel entitled to them

    B) were wall street culturally encouraged to lie/cheat to get said bonuses

    C) Lobby and control congress to make sure all the laws favor them

    D) set wall street up so all the advantages go to the street

    E) set up usurious loan products that keep poor consumers perpetually near bankruptcy

    F) took our tax money and paid themself bonuses when they messed up! That's theft and shows a complete lack of accountability!

    Financial services have grown to represent an inordinate amount of GDP. It's useful but it's not in truth and shouldn't be in practice the most productive sector in America. It should be a financial utility that lets producers of true value operate their companies.

  • Report this Comment On February 07, 2009, at 1:23 PM, a6shadowhawk wrote:

    My take on this is to forward my response to a Bill Oreilly episode last December:

    Regarding your comments on Talking Points from December 5th, where you stated “that’s the way the real world works sometimes” referring to the corrupt business practices of the most powerful banks in this country is very difficult to accept. You are the best in the industry and have the resources to take this a step further and I urge you to not let these guys get away with these atrocities.

    The Nation calls on you and your team for help. You have gone after corrupt judges, politicians, businessmen and college professors and uncovered their self-serving agendas. On behalf of all Americans, please go after the bond rating companies that rated risky, aggressive business practices by the builders, sellers, brokers, lenders, government finance agencies, and Wall Street as AAA investment grade mortgage-backed securities that were sold to the world. Wall Street must have applied tremendous pressure and offered attractive commissions for these companies to completely disregard the most fundamental analytic techniques needed to rate these securities as speculative junk bonds. Countrywide would not have made risky loans if they could not bundle them up and sell them off to investors as “business as usual” and Wall Street would not have issued the creative derivatives and credit default swaps backed only by their “reputation” to hedge against these risky securities.

    I accept the cyclical nature of a free capitalist economy but a lot of fraudulent people brought this economy to its knees while pocketing hundreds of millions of dollars at the expense of hard-working Americans. The fortunes these people made only makes it easier for them to profit further at the expense of others as land and property values continue to decline. This is the story of a lifetime and will require the best of the best to uncover the facts. I have total confidence in your ability to get this done and look forward to following your efforts.

    My final comments are there is too much inbreeding on Wall Street to conclude that the talent pool is so small that salary caps will drive away the talent needed to run these banks. These guys need to be taken down and replaced with long range visionaries that consider the best interests of the investor as well as the reputation required to lead the world in the financial sector. Salary caps are in order with plenty of opportunity for compensation down the road as these banks recover.

    God bless America.

  • Report this Comment On February 07, 2009, at 4:24 PM, done4nau wrote:

    The cause of this mess is poor regulation of greed. I'm not talking about just corporate greed but of the kind of personal greed that shows itself with million dollar salaries and billion dollar bonuses.

    for a lone time in Japan the CEOs salary was 10 times the wage of the lowliest employee. If the wage was kept to 100 times the wage of the lowliest employee then nearly all of the CEOs in the country would take a dramatic pay cut.

    There will aways be morally bankrupt people who feel that the other guy should be fleeced. Madoff is just one. Anyone who does financial machinations and causes "the little guy" to get hurt needs to take a look at himself. Those who have no moral compass need to be prosecuted. As one of the little guys that lost nearly all, I think that those who made profit in the past year by legally or illegally cheating others should give the money to whomever they cheated, or back to the companies or to charity so the people who were cheated can continue to eat.

    I think that the federal government should have new, tougher laws with stiffer penalties. Personally, I'm not feeling very forgiving and would like to see some of them stand before a firing squad AFTER all of their money is confiscated. That would be a way to help pay for the stimulus package and for the financial companies to pay back the money they borrowed from the taxpayers.

    Ah, yes. I see the super rich and the powerful to be evil. You don't get and stay that way without manipulating, cheating and underpaying employees

  • Report this Comment On February 07, 2009, at 5:45 PM, MitchinMS wrote:

    I have to agree that the credit/blame should be shared throughout the organization.

    A) Did the IT team dream up and build all the equipment themselves? No - they took advantage of advances in technology and current best practices created by others and simply implemented it in their own organization. Bonus? Sure, if the entire organization is profitable and the project is successful. Millions? No - how about a 10% kicker?

    B & C) Could the "stars" have done the deal without "Goldman Sachs," "Morgan Stanley" or "Bank of America" on their business cards? If so, hang your shingle up and go out and do the deal yourself - keep all the profits! Why work for a company and share your rewards? My hunch is that they realize they need the company, its reputation, and what their prospective clients assume are its solid resources, to get the deal done. When you join an organization with many business units, you accept that your compensation is tied to the results of ALL the business units, not just yours. Bonus? Sure - if the company's making money. If not, either wait until it does make money or go make your own deals. Personally, I don't think the bonuses need to be as big as they are to provide a reasonable incentive, but you're worth what you negotiate. Hopefully, shareholders will figure out ways to rein in firms' comp packages...

  • Report this Comment On February 07, 2009, at 5:52 PM, robbingusblind wrote:

    Finally! Someone on the inside has opened up and (unknowingly) shown the world what a vile, arrogant, self-centered beast the investment banker really is.

    "People are losing their homes."

    - "They should have done better research."

    "Retirees are having to go back to work."

    - "They should have saved more."

    "No one can afford health care."

    - "They should get a job at Mega-Corp like I did."

    "Blue collar workars are getting laid off."

    - "It's the result of a free-market economy. They should go back to school."

    "You're not getting your bonus."

    - "OH MY GOD!!! NOOOOO!!! LIFE IS SO UNFAIR!!! THIS CAN'T BE!!! I DESERVE THAT BONUS!!! WHY??? WHY??? WHY??? I THINK I'M GONNA DIE IF I CAN'T AFFORD TO GET THAT FERRARI THIS YEAR!!!"

    The Titanic is sinking and Little Matty is throwing a fit because the captain won't let him put his solid gold baby grand piano into the lifeboat.

    Poor Matty! It's SO UNFAIR!

  • Report this Comment On February 07, 2009, at 5:59 PM, Robin1938 wrote:

    Financial incentives work so when you give incentives to risky behaviors, one gets more of them. It is also probably unwise to have bonus comp exceed some % of base salary - my pick would be 20%. Some respect for risk management would also help.

  • Report this Comment On February 07, 2009, at 6:53 PM, ChannelDunlap wrote:

    Scenario Z: Some part of a company does really well. The company as a whole tanks. Is there money to give these people bonuses? No. These banks should for all intents and purposes be bankrupt, it's time they start acting like it.

  • Report this Comment On February 07, 2009, at 7:04 PM, MDowdy wrote:

    A group within Company X's technology division completes a massive overhaul of the company's data centers. This overhaul will not only improve the security of the data centers, but also reduce the power draw, increase speed, and reduce the manpower needed to maintain it on a day-to-day basis. The project will potentially save Company X tens of millions of dollars in overhead. Does this team deserve bonuses?

    Well, if this is like most tech companies, 'no', the team did their job. They get paid for doing their job. Why should they expect a large bonus? Most people don't get, or expect, a bonus for doing their job; that's what their salary is for. The Wall Street attitude of being 'rewarded' for doing ones job needs to stop.

  • Report this Comment On February 08, 2009, at 12:42 AM, TMFKopp wrote:

    Wow there are a ton of comments here and I really appreciate the fact that so many have read this and taken the time to share their thoughts. It's obvious that a lot of people disagree with my conclusions and I can't say that I didn't expect that when I wrote this. Since a lot of the comments cover the same basic points, here are a few responses to cover a good portion of the ground:

    - This article was not arguing whether or not financial institutions should have received TARP money. The fact is that they did, and now that taxpayers are part owners in these companies I don't think it would be a good idea to chase away the best employees.

    - I could care less if financial services professionals receive big bonuses. As the title of the article suggests, I'm no longer an investment banker so their pay does not impact me in the least. Plus the bankers that are out there have more money than they need. That's all beside the point though. If the fee levels that banks can charge fall, perfect, nobody will cut bankers huge checks. Government stepping in to cap pay? Not so great.

    - Do people go to see the Yankees play because they're the Yankees or because Derek Jeter plays for them? A bit of both right? That's why Jeter gets paid so well. A good banker is good at what he (or she) does and has a great Rolodex. Those skills and contacts can be helped by being backed by a name like Goldman Sachs. But make Goldman cap pay and these top bankers can do well hanging their own shingle. For examples of this see Evercore Partners, Lazard, Thomas Weisel Partners, Blackstone, and Greenhill -- to name a few.

    - Should a tech team get a bonus? Google seems to think so. Not only do they reward employees with stock options, but they seem to consider it reasonable to reprice those options if the stock falls.

    - There seems to be a lot of interest here in laying a lot of the blame for our current crisis at Wall Street's feet. There's a lot of blame to go around, Wall Street helped facilitate, but they didn't force anybody's hand in taking out a mortgage that they couldn't afford, nor did they force any hands in running up credit card debt. Wall Street played its part but it certainly doesn't hold a monopoly on greed.

    - Not everyone at an investment bank is conducting the type of business that exposes the bank to massive losses. As noted in the article, in business lines that do expose the banks to big losses, compensation should be based on longer term results, not immediate fees or other short term results. In keeping with the theme of keeping the heavy hand of government out of the issue, I would hope the latter is something the banks themselves would wise up and do themselves.

    Thanks again to all the readers who took the time to share their thoughts.

    Matt

  • Report this Comment On February 08, 2009, at 12:17 PM, kabierwatz wrote:

    Matt,

    You're right that merit should certainly be rewarded, it's just that the timing is all off, the sector is in chaos, and government money is being involved. I work long hours too, and that's because I'm glad to have a job in this economic environment. The simple truth is that bonuses are appropriate when firms can afford them and right now the financial sector is the last place firms can afford to hand out cash, no matter how good their employee's performance is. Employees should accept this simple fact and not feel entitled to anything given the current climate. I hate to say it but in this article you are wrong.

  • Report this Comment On February 08, 2009, at 12:39 PM, incaspin wrote:

    There are some very ignorant people here. First off making an analogy the salary cap in football is ridiculous on too many levels to list on a single post, but here are a few thoughts:

    1) The cap in football is not a cap on a specific employee's compensation but rather on the payroll of the entire team. The only way in which they are the both the same is if the number of employees at each bank is the same, they all receive the same salaries and they all receive the same performance bonuses as a result of identical performances.

    2) The government has no right to cap anything. This is preposterous it violates our economic fiber as a fundamentally capitalist economy. The first mistake was in granting these bailouts now people expect substantial government intervention into the private financial sector, what's next?

    3) Darwin's theory of evolution. If the fat cats on wall street are over-valued then the market will correct this. Companies doing business with investment banks aren't in the business of losing money to make investment banking appear to be a highly profitable industry.

    It is not the bank's responsibility to curb bonuses it is the government's responsibility to assume no responsibility and to let those banks that have over-valued their employees sink in their own juices.

    4) The moral police here are ignorant. Companies can do with their money whatever they want. They can reward their employees however they want. If they can't afford it then they are dumb and will crumble or force themselves to to restructure their organization.

    5) Instead of complaining about how much money people make why don't you complain about how badly others are being compensated or about how others are being let-go? It should never be a problem that Warren Buffet is alive, it is always a problem when kids in this country die of malnutrition.

  • Report this Comment On February 08, 2009, at 1:29 PM, none0such wrote:

    I agree with the post by JoeDeanPhipps where he states this industry should be regulated. As stated by TastyLunch, financial services have grown enormously in terms of GDP; the Economist recently listed the very large increase in the number of employees that has occurred over the past twenty years at today's TARP recipients. At this point in time, collective responsibility for failure distributed over such large companies is not in anyone's interest. Neither is capping bonuses/salaries now or later. What should be regulated is the size these companies can become and what kinds of investing they can do and with who's money they can do it with (for example, AIG had no business betting its float on house prices even if they were able to understand the CDOs they were buying - other people in insurance knew this risk, how come they didn't? ... and we and our children have to pay for it).

    As I understand it, financial banks only came about because they could do what commercial banks could not do - whether by choice (read 'trusted relationship') or design (read 'lack of government regulation'), people seeking their services were looking for investment vehicles that they could not get anywhere else. It was not until many of these private partnerships and companies began to go public or be bought by publicly traded companies (read 'easy capital') that the idea of 'betting the company's money' became 'betting with other people's money' and we get the present 'heads I win, tails I still win' top management ("bet the ranch, what the f***, its only a ranch") together with the 'I'm entitlement to your tax dollars' because my part of this bailed-out, sorry behemoth of a company actually made money from the sweat of my exhausted brow.

    Again, the Economist reported that more than 70% of people in the financial banking industry who replied to a poll said they received a bonus in 2008 - a year we all know was crappy - and about a quarter of those said they were not satisfied with the amount received. Was this bonus to retain talent? Where are these people going to jump ship to in retaliation for their unappreciated service by their present employer? With all due respect to Mr. Koppenheffer, you stress this retention-in-bad-times and reward-in-good-times of talent too much. You are right to state that the shareholders should determine compensation: now that taxpayers are shareholders in these companies, I hope you won't mind us voting for retroactive clawbacks so that this money could be used for something truly worthwhile.

  • Report this Comment On February 08, 2009, at 3:12 PM, AeroSteve wrote:

    I'm sure everyone knows this, but maybe some highlight is useful. Executive bonuses in public corporations are set by the board of directors (themselves). The board of directors is elected by the shareholders, but usually the directors own far more shares of stock than any other individual shareholder and can get what they want since it would require some kind of organized opposition from a great many disparate shareholders to stop them. So for the board "performance" is not a very effective measuring stick. Big bonuses are related to big money flows and certainly the deregulation due to the so-called "free-market" mania of the last 30 yrs. has promoted the "giga-banks" and "giga-corporations" trend which leads to a "terra-sized" "binge and purge" cycle ("boom and bust" or "business cycle" are too exciting and too mundane for what has been constructed). The institutions have been grown to unmanageable size due to the corporate socialism that has been purchased from congress. If smaller banks would not be able to make giga-loans that can produce giga-failures then so be it. They shouldn't be made. Binge and Purge as a business model is corrupt and if we look closely (not even needed now) it does resemble organized crime activity, ponzi-payola-protection. The free-market is supposedly "efficient", but efficient at what? Distributing risk? Distributing reward? Without thoughtful oversight capitalism will destroy portions of itself repeatedly. By what measure is that "efficiency"? Speed is not efficient if it produces large amounts of "waste". What person is acceptable "waste"? Re-separate the "banking" and speculative "risk" functions and make receipt of public funds contingent on clear guidelines of repayment just as any borrower would be expected to abide by. Smaller economic units with more local responsibility should temper the problem of excessive "bonuses". Every natural system has damping built in or it can go unstable. We need to restore the damping in the financial sector that has been removed over the years or repeated and larger instabilities will be the "reward" of it's "efficiency".

  • Report this Comment On February 08, 2009, at 9:01 PM, missingfool wrote:

    I am qualified to comment on scenario A because I have spent many years in the Information Technology unit of a company that got merged into JPMorgan and still have many friends there.

    The people who do this type of work are told that's what their salaries are for. I'm talking about the people who actually do the work and are there at nigh and on weekends. Any bonus is a few thousand dollars and more tied to corporate profit levels than individual accomplishment. The big bonus goes to the Vice President and Chief Information Officer for "meeting goals", which he has accomplished by cutting staff and making people on salary work nights and weekends.

    Meanwhile, they still managed to find a way to justify a bonus for the Chief Investment Officer and other senior managers who had the idea of putting the company's capital in high risk CMOs for a couple of extra basis points.

  • Report this Comment On February 09, 2009, at 9:27 AM, saunafool wrote:

    "Fooled by Randomness" gives the best analogy:

    If you have 10,000 coin flippers, some of them are going to flip "heads" 10 times in a row. It was pure luck.

    If you have hundreds of bond traders, some of them are going to get the trend right 5 years in a row. The banking industry crowns these people as geniuses and gives the bonuses so large that they represent life-transforming wealth.

    What this financial incentive fails to recognize is that a huge percentage of the success can be attributed to luck. The bonus doesn't get called back if the bond trader "blows up" the next year and loses all the money he made during the previous 5 years--according to Nicolas Taleb, a very common scenario.

    That's the problem. The rewards are huge for people who are willing to take huge risks. There is no incentive for long-term security of assets. So, as time goes on, the risks multiply.

    Likewise for corporate management. They get paid in huge amounts of stock options. If they bet the farm and the stock goes down, they lose nothing. If they bet the farm and the stock goes up 10X, they walk away with hundreds of millions, even if the company implodes a year after they sell out and retire to Aruba.

    Basically, we have created an executive compensation system that rewards the worst type of risk taking with no punishment.

    As for the various scenarios, the answer is simple: "if your company takes bailout money, no bonuses for anyone." If the best people leave because of this, it is presumably to go to a company that didn't need a bailout and can therefore pay bonuses. Good luck finding one of those in the financial sector.

  • Report this Comment On February 09, 2009, at 11:30 AM, RHaganC wrote:

    Go read Taleb's book "Black Swan," and then remove this dribble from a decent wbsite.

    The whole industry is paid for taking risks in the short term, while the lasting actual effects of the decision are not realized yet. B that time (as you noted in one instance), the perp is already gone with his paycheck and left the mess.

    Your damn right, it time to adjust how they are paid. Way too much emphasis is placed on taking risks that don't factor in the unexpected.

    the whole system is bogus. You risk and win, you get paid. You risk and loose, you have the country by the b@lls, and the taxpayer has to bail you out. Talk all you want, and try to twist this industy into having decent people - but it's BS. You never loose either way, and tax payer has to cover your loss.

    Thanks for using America as your toilet. While you spend my tax dollars, I'm going to get back to trying to generate some taxible income for you.

  • Report this Comment On February 09, 2009, at 5:14 PM, mpp100 wrote:

    To value any financial professional as worth more than the President of the USA, which is what we're really talking about here is not only ludicrous, it's an affront. I would cast the net wider and include any professional sports figure, any CEO, COO, CFO but that's really not the issue here. Here the issue is a sense of entitlement that reeks of arrogance. Sure, the pro might make millions and millions of dollars for the company and shareholders but the President runs our country, aguably the lone superpower in today's world with trillions of dollars in committments spanning the globe. What an incredibly foolish (little f) point of view. I can't believe anyone could honestly look at oneself in the mirror and say, "Yep, I'm way more important and way more influential and way more valuable than the President."

    my two pennies

    mike

  • Report this Comment On February 09, 2009, at 5:59 PM, TMFKopp wrote:

    Thanks for the continued comments.

    @saunafool and RHaganC

    Your comments suggest that everyone working at an investment bank is making highly leveraged bets on structure mortgage debt -- or some similar type of transaction. Reread Scenario C (or B) above. There is a couple hundred million of deal fees generated by the banks involved with no further recourse to the bank. It's pay for services rendered, not short term income on a long term gamble as your comments suggest.

    @mpp100

    "To value any financial professional as worth more than the President of the USA, which is what we're really talking about here is not only ludicrous, it's an affront."

    I 100% disagree. There are many reasons that people take jobs. Your rewards can be in terms of fame, power, non-cash perks, the promise of future cash rewards, the feeling that you're doing good for the world, and, of course, cash in your pocket -- just to name a few. The President gets paid only moderately well given the job that he/she is taking on, but the rewards in terms of power, fame, and non-cash perks, not to mention future financial benefit, are through the roof.

    To suggest that worth is determined solely by the size of your paycheck would likely mean that we'd have next to no one working as teachers or at nonprofits.

    People head for Wall Street not to end up with a teenage fan club, or to feel like they're doing good for the world, or to have a hand in the political decisions of the country -- they do it for the money. And hey, if money were everything in a job, I'd probably still be a banker myself.

    Matt

  • Report this Comment On February 10, 2009, at 7:57 AM, efti wrote:

    The article is worth recommending only for the comments and discussion it produced. The level of corruption and greed on Wall Street is even more evident by the fact that even someone who left Wall Street is still defending their Mafia like structures and rewards. No bonuses for all companies that got tax money. Let them go in this environment. We'll probably see less than 2% leaving for this reason. It's as simple as - no tax money => bankruptcy => no bonuses! Why should you then pay them out of tax money?!

  • Report this Comment On February 10, 2009, at 8:56 AM, RHaganC wrote:

    You are right Matt, My post does imply that ALL transactions are of this risky caliber.

    Fact is though, it doesn't matter if it's 1 transaction or 99% of them. When that transaction(s) is bad and wipes out all the wins and/or the "safe" bets, what does it matter the ratio?

    And, what does it matter if it is only one that kills the entity and the taxpayer has to foot the bill?

    You can pick at my details all you want, but you can't ignore the the win/win for the risk taker and the win/screwed (BIG TIME) scenario for the tax payer.

  • Report this Comment On February 10, 2009, at 11:34 AM, lewisabroad wrote:

    Matt, I like this article, but I want to dig a little deeper into your rationale, which is based on one thing - bonuses should be based on increases in profit/decreases in cost.

    Scenario A: read missingfools comment - he clearly knows more than I ever would.

    Scenario B: Should she get commission based on sales? absolutely. To what extent? I think that's the rub. Brokerages should not have an oligopoly on who gets to trade on the floor. If they didn't then free market mechanics would push trade commissions close to zero and her bonus would not amount to a lot. The SEC and lawmakers for some reason think this system is capitalism.

    Scenario C. Giving them bonuses actually creates an agency problem for the companies trying to merger. The bankers may be pushing for something to happen that is not in the interest of shareholders and/or employees simply because they are after the fees. Isn't this in their job title anyway? Give them a high salary and let them behave more responsibly. The managers at the companies trying to merger are likely just looking for bonuses themselves at the cost of laying off 10-20% of their to-be redundant workforce. Also, agency problems like this are what allowed Skilling to coopt wall street and fool people into thinking Enron was actually making money. His problem was he went too far and got caught.

    While I-banking was profitable for a while, its profits are illusory (based on valuation of securities using fiat currency to begin with) and dependent on events occurring within the "norm". Once you get outside the realm of the financial engineers' models you get the kind of collapse we just saw. When that happens the taxpayers pay and the real economy gets hit hard.

    The thing that makes people mad is that it looks so much like people are gaming the system to make a buck without real thought for how it affects the people outside of the room. It has a name and it is greed. What about the people laid off in a merger? Is the new company really more competitive or was the money just too irrisistable for those that were in a position to get it?

    Because of this repeated stupidity/greed I find myself still not gainfully employed (and unable to collect unemployment) seven months after graduating with a master's degree - and not for lack of trying. Try raising a family on THAT kind of income and you understand why people get mad.

  • Report this Comment On February 10, 2009, at 12:11 PM, bigdaddyben1953 wrote:

    Is there a problem with terminology here? If a deal is made and completed (all money has changed hands) then a commission is paid-it is not a "bonus" which implies something "extra" Commissions are part or all of the salary package for many types of workers. If a deal is made that generates a large commission, it is not a bonus.

    A bonus is something "extra" paid if the entire company is profitable and there is "extra" money to be divided up.

    Clearly, no matter how good an individual employee's performance, if the comapny is not profitable, no "bonus."

  • Report this Comment On February 10, 2009, at 1:02 PM, Deepfryer wrote:

    The earlier post by robbingusblind (made on February 07, 2009, at 5:52 PM) is tremendous. I think he summed up this whole issue perfectly.

    incaspin's post... not so much.

    "3) Darwin's theory of evolution. If the fat cats on wall street are over-valued then the market will correct this. Companies doing business with investment banks aren't in the business of losing money to make investment banking appear to be a highly profitable industry.

    It is not the bank's responsibility to curb bonuses it is the government's responsibility to assume no responsibility and to let those banks that have over-valued their employees sink in their own juices."

    I think you're missing the point here. If they didn't take the bailout money, then I don't think anyone would have a problem with them recieving their bonuses. It doesn't really follow the "theory of evolution" if these companies are going to take money from taxpayers.

  • Report this Comment On February 10, 2009, at 2:20 PM, difranr wrote:

    I think that this article's author should read the following to get some real perspective that is not warped by the world that is Investment Banking:

    Let the "talent" walk: http://tinyurl.com/dzcej8

    I love the following line:

    "So call their bluff: No bonuses. If you don’t like it, go find a better deal someplace else."

    Yeah good luck with that Mr. Investment Banker!

  • Report this Comment On February 10, 2009, at 5:12 PM, kurtisj wrote:

    Hey Matt-

    Agreed, how merit compensation is awarded needs to be reviewed. At the same time, it seems fair that taxpayers are outraged when irresponsible/reckless decision-making has been made at their expense. Reckless speculation, thinly veiled as overeager optimism by overpaid and unaccountable executives, is not to be excused.

    I agree with your thoughts that merit based pay for executives, salespeople, etc needs to be given careful consideration and can be successful.

    When asked about compensation limits or additional regulation on the banking industry, it seems that employed bankers (actually, lawyers for american investment banks, horrors!) themselves do not know the answer to the question "what would be best?". So someone has to step in, because the repeated taxpayer giveaways to S&L, banking and financial services industries have become expected and the "private" side of the industry has failed. There has been no accountability for its lack of risk management, but the providing a stable financial system is a role that has been assumed by federal government. Under those terms, these guys justify their rewards in terms of short term achievements, when their work produces risk to the public over the long term. It was purposeful and reckless to create "off balance sheet" CDS exposure by these executives. Sure, I'll bet a billion dollars of your money without your knowledge on a two year event if you pay me 10 million dollars today (you just might try to find me in Mexico tomorrow).

    In the U.S., the banking industry thrives in a self serving culture of entitlement, partly because big banking/insurance/finance is not altogether private industry (it is in part an extension of federal government with plenty of back scratching going around), partly because the employment pool for the industry is not competitive enough, and partly because compensation structures provide no accountability whatsoever.

    A few ideas -- the makeup of compensation committees (corporate and familial relations, no matter how distant), their decision making and resources must be transparent to the public and their rewards revocable. There can be no such thing as an "off balance sheet asset". And not only must "merit" compensation structures be tied to long term goals, but it is time to open the door to tighter regulations that can hold corporate america accountable in court and undeserved rewards revocable. The FDIC, the federal reserve, and government sponsored enterprises (freddie mac, freddie mae) should be dismantled and replaced. Treatment of a corporation as an individual must come to an end.

    Just a few ideas. Nicely written article, thanks for sharing your thoughts and your past.

  • Report this Comment On February 10, 2009, at 8:19 PM, Dart65GTConv wrote:

    Talent commanding high returns on their efforts are worthy of what ever pay the owner and market will pay. I am not rich maybe comfortable and earned it. Has anybody heard the comment rich people lately. Enough to make you sick. Success the 8th word you can't say on TV.

  • Report this Comment On February 11, 2009, at 1:11 AM, nimic1234 wrote:

    "A group within Company X's technology division completes a massive overhaul [...] Does this team deserve bonuses?"

    No, and they will not get any (not above 4 figures anyway) in most Fortune 500. When have you heard of a tech team getting millions in bonuses? Spare me the Google example, that was back when they had 200 employees. Technical teams at Google today do NOT make millions.

    The guy at Unilever who has the idea for a new candy bar that will generate hundreds of millions of dollars yearly for decades to come wouldn't dare to claim 15% because it was his idea or because he spent months "not seeing his family much" to get the project off the ground. Give me a break, seriously.

    Investment bankers talk like they have no idea what's going on in the real world. Do you not realise that many, many people out there work very hard and generate millions and do not receive nor claim tens of millions in "bonuses"?

  • Report this Comment On February 11, 2009, at 9:16 AM, DarthVater wrote:

    I am not sure the root cause behind the issues is mainly questionable judgment as to who deserves a bonus and who does not. The fact that these decisions lead to ethical concerns is indication that the problem is somewhere else:

    The business model behind investment banking services, and this includes the entire hedge fund industry, is unfortunately not a services model. The pricing model for such services is more like a tax, driven by % revenue and not based on the services provided. This leads to a disconnect between the value-add from a financial service and its cost/price for the customers. This disconnect ripples through to employee bonuses as well.

    The biggest damage is in the market dynamics this drives and the associated opportunity losses in the economy: Investment banking services for M&A transactions are typically 1% of the deal value. It does not matter how complicated the transaction is, how long it takes and how many people are working on it. Your investment bank's primary interest is that the other party in your transaction negotiates as much money out of you as possible. This will increase their fees and their bonuses. And it motivates them to go after the easy low hanging fruit that requires the least work as opposed to more complicated transactions that may generate more value for their clients

    This is a bit similar to the real estate industry where the business model for real estate agents exacerbates pricing volatility of the underlying assets.

    I would predict that if the financial services business model was uniformly based on fees for a service like in the consulting industry we would not have that whole conversation about bonuses. Better qualified people could command higher rates and higher bonuses and those bonuses would be relative to their base salary and not relative to the revenue of their customers. And it would still fulfill the requirements of a performance based compensation approach.

  • Report this Comment On February 11, 2009, at 10:04 AM, RHaganC wrote:

    Good Post DarthVater!

    Actually get paid on the empirical evidence of your longterm success; what a concept!

  • Report this Comment On February 11, 2009, at 2:57 PM, socialconscious wrote:

    Any industry that receives taxpayer money is subject to scrutiny from the bottom up. I understand your argument for bonuses as retention money but not with public money for private benefit. Public money is a trust

    Also with regards to the "pitchforks" many industries have this problem with folks who make a lot less and have 1/100 of the responsibility of an investment banker for their companies performance. Most automobile assembly line workers are innocent of the choices management make yet they hear criticism all the time. They have to hear attacks based on their unions and 1% of line workers making $70,000+. The truth is largely they make $15hr if they have a job and bonuses=0.

    In comparison broke banks use their TARP money to hand out bonuses to folks that did not perform. Overspending bankers start crying when they lose their jobs or if they have to live on $125,000+ without their bonuses. Let them work 1 day on aline with no job security. I live in NYC and the loss of the financial sector has put a whole in our budget. Despite this I say no bonuses for anybody! Corporate Darwinism!

    Respectfully submitted

    Social C

  • Report this Comment On February 11, 2009, at 4:56 PM, mpp100 wrote:

    President Bush--wages about 400K and all those perquisites. Security, chaffeur, "private" jet, prestige and power.

    Let's not forget scrutiny, accountability, and judged by the American people for his job performance that they selected him to perform.

    From CNN: 2007 Compensation. Goldman Sachs Lloyd C. Blankfein, Chairman and CEO salary--$600,000, Bonus-- $70.3 million and all those perquisites, chaffeur, security, private jet, prestige and power.

    Let's not forget lack of scrutiny, accountability or judgement by the American people. Selected by his peer group, not Foolish individual shareholders like us, and as yet, unjudged and unapologetic.

    Secondly, just an observation but Treasury had a few former GS men when Lehman was allowed to fail, and I believe this precipitated much of the mess we collectively find ourselves in. Ignorance, competiveness, revenge--so many scenarios play out as possible answers.

    I am angry with this situation and whom I preceive to be accountable. Heads haven't rolled and "performance bonuses" haven't been returned for the "stellar" years leading up to this crisis nor I doubt will they be. The "former CEOs" and others of their ilk and tenure are rarely mentioned in the press and I suspect are content to shy from the spotlight, reveling in their ill-gotten gains. It illustrates the dichotomy in our society, destroying the intent of "and justice for all."

    respectfully

    mike

  • Report this Comment On February 12, 2009, at 3:03 AM, rider00 wrote:

    Mr Koppenheffer,

    It seems that you've worked in the IB world so long that you are blinded by its sense of entitlement. In each of your examples, you tried to present the case where employees "deserve" a bonus for hard work that results in revenue generation or cost savings. In each case, to a true capitialist, the answer is a resounding no, they do not deserve anything for doing their jobs. The people who deserve the spoils of a company's success are its owners. Typically shareholders, but now also the US government and tax payer. Employees should only be paid the bare minimum that will keep them productive and loyal to the company. In the case of the IT example, if it was clear that key IT people were considering other offers, then a retention bonus might be appropriate but only if the future value of that employee exceeds the cost of the bonus. In some cases, even multi-million dollar retention bonus may be required, but the industry has clearly opted for a performance bonus based on isolated cases at the expense of the shareholders/us taxpayer. Another argument (not voiced in your article) is that "some" of the bonuses were contractually obligated. Well, what contracts aren't being renegotiated under the current economic environment? I would wager that a true ROI study on the 18B in bonuses paid would not yield a convincing business case even on a 5 year horizon.

    To look at it another way, let me apply your logic to another example to help you step out of your world of entitlement:

    Your home and many neighbors and businesses are suddenly threatened by a major flooding situation from a hurricane. You're insurance doesnt cover damage to your home from this type of act of god. To save the day, a team of city workers tirelessly stack sandbags and pump water. They work all hours during the raging storm- a hundred+ hour week perhaps in the buildup and aftermath. Their efforts succeed and they save you hundreds of thousands of dollars in flooding damage. In fact, the community is saved hundres of millions of dollars due to their efforts. By your logic, they "deserve" bonuses from you relative to the damages they prevented (perhaps you shell out $30K from you own pocket and the community pays them a few million more).

    Hmm, I don't see that happening.

    I understand that the employees in IBanking had a very different expectation then a city worker. But those expectations need to change yesterday.

    I have no problem with companies paying whatever salaries they want as long as the shareholders agree that it is in their best interests. Because taxpayers have given these banks amounts of money that come close to or exceed their market caps, the US taxpayer should be a majority owner of these banks. The decision not to nationalize the banks was one that was viewed as being in the Tax Payers best interest long term. Rather then humbly accepting this second chance, the banks truly bent the tax payer over a barrel.

  • Report this Comment On February 12, 2009, at 12:34 PM, wclkf wrote:

    The writer should not forget that many people work very hard. The boundaries of success or failure of an individual within a corporation are leveraged by the corporation itself, hence, some recognition should be given to outstanding individual performance (i.e. salary), but if there are no corporate profits, individuals working for the corporation, likewise, should not receive bonuses. Sorry - life isn't always fair, but joined in success remains joined in failure. Corporations are people joined into one common effort. If that principle was better observed, this crisis would not exist today. And let's not forget - the stockholder invests in corporations, not individuals, so let's keep the playing field level for all stakeholders.

  • Report this Comment On February 12, 2009, at 1:04 PM, minchumina wrote:

    The Merrill Lynch debacle doesn't surprise me. I used to have an account there--7 figures--and got so tired of dealing with arrogant account executive attitudes that I moved my account. There was no incident provoking it -- no disagreements. Gave them no warning. Just closed my account one day. Never heard one word from them. You would have thought someone would have noticed, called or written to at least ask if there was a problem. I don't know what those guys were getting bonuses for.

  • Report this Comment On February 12, 2009, at 11:48 PM, MaxSharpe wrote:

    Forget the TARP. In normal times, Matt is right. There's a chance that there is an i-banker in this slew of commentaries that disagree with Matt, but I doubt it, and as far as still drinking the Kool-aid (I think he means number 62 on the free instant coffee machines they kept us awake with as we pulled consecutive all-nighters) -- I think that it is fair that units be siloed and that earners be paid a percentage of what they earn -- after the cash is collected by the firm. Not on "earnings", of course.

  • Report this Comment On February 13, 2009, at 4:49 PM, DarnFoolAgain wrote:

    Here is an example for you:

    John starts up a new company to create a software product to protect an individuals personal data. He secures a loan from JPM to get started. He hires 10 people and they all work 12-20 hours a day for over a year and finally have a product to release and the CEO has landed a large customer that in a short will will allow the company to break even. Bad news, no bank will now lend them money to continue operations and they have to shut down. Everyone loses their job and there is no money left to pay severance.

    Question - do they deserve a bonus?

    Answer - no, but they do qualify for a loan. They have a good product and good opportunity.

    The moral is that nobody at JPM should get a bonus no matter how well they did. The bank is nearly bankrupt. Wake up. A nearly bankrupt institution does not pay bonus no matter how hard anyone has worked. Sorry, that's capitalism.

  • Report this Comment On February 13, 2009, at 8:13 PM, rdlincoln wrote:

    I have a big problem with this author and the ideas he advances.

    In another age, it was thought that the most valuable man in an organization was worth no more than about 20 times the value of the least. I read recently that today it's about 500. Examples abound of multiples of several thousand.

    No man on earth is worth tens of millions of dollars a year. Period. Talk about wretched excess and limitless greed.

    In my lifetime, I'll have earned about 1 million dollars

    and I'm in a profession that is both skilled and in demand, regardless of the state of the economy.

    Something is wrong with our world when a man wants to spend more on decorating his office than most Americans will ever earn in their lifetimes.

    All of that aside, there are numerous examples of CEO's today that are mediocre at best and are grossly overpaid. They are "hired guns" and motivated solely by money and greed. I dare say that many small business owners from Main Street, USA could walk into these giant monster mega-corporations and do a better job of running them.

    The old economy, we knew, is gone and isn't coming back, partially because of these reckless and irresponsible top management types and partially because our Federal government is completely inept and our representatives no longer represent the American people. The two forces wrecked our economy and thus the whole world economy.

    Our banks should not have been bailed out, they should have been allowed to go down in flames. Everyday on Main Street, USA, small businesses fail and sometimes it's not their fault. Most small business in the country is under capitalized and only 2-3 months away from financial disaster at all times.

    I heard recently that a spokesperson for a giant monster mega-bank has been quoted as saying, "we're going back to old fashioned conservative business practices".

    Many smaller banks in the US did not engage in questionable practices and are in fine shape financially. These are the banks we should support.

    I'd lose no sleep if the CEO's and top management of these "bailed out" banks were sent to jail for a long time. They caused irreparable harm to the retirement of millions of Americans.

  • Report this Comment On February 13, 2009, at 10:18 PM, chumptoo wrote:

    As some one who led technology groups at several FI's I can assure you that Scenario A is completely bogus. In 20 years, I have never been rewarded for savings that technology delivers. All bonus is based on how much profit the FI makes.

    It another example of banking executives running the banks for their own benefit, not customers, not stockholders, not employees, not society at large.

    I say nationalize the banks!

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