Banks on Wall Street are almost back to the pre-crisis days -- at least as far as paying bonuses to their executives and bankers are concerned. These banks -- the same ones that rode their employees' incompetence to the brink of collapse -- are now splurging millions of dollars on incentive compensation once again.
Banks say they need to incentivize future performance of these high-level executives (hence the lavish bonuses), but their arguments sometimes go against norms established during the nadir of the financial collapse. Shareholders' stiff opposition to such moves and regulators' increased scrutiny are making the job difficult for these banks -- perhaps rightly so. This all makes me think: Are Wall Street bonuses justified?
Payments are on the rise
At a time when the economic recovery stumbles and one crisis after another threatens to drag down the economy, Wall Street banks and financial institutions are devising ways to avoid intense public glare and award hefty sums in bonuses. However, the astonishing levels of pay that these banks are proposing have united Americans of all ages against such proposals. Aware of the growing public resentment, the Securities and Exchange Commission is now proposing to officially regulate the amount these banks can pay in incentives. Although banks find such a move vexing, claiming a troubled economy and the resulting shocks are not their responsibility, they often forget that, in most cases, their risky practices led to the economic upheaval.
A report published by New York State Comptroller's office in November 2010 stated that cash bonuses to Wall Street grew 17% to $20.3 billion in 2009. Financial industry critics say such exorbitant bonuses are often the reason why bankers assume disproportionate risks. They cite the bailout during the height of the financial crisis and say government money should not be used to pay bonuses. The concerns raised are often genuine. For example, the bankers had little knowledge of the products that they had bet heavily on during the days leading up to the crisis. Nevertheless, the bankers were enjoying giant bonuses.
Fat cat pay packets
Even as the economic crisis showed no signs of abating and banks and financial institutions continued to reel under losses, the practice of awarding these executives with "fat cat pay packets" continued nonetheless. In 2009, JPMorgan Chase
This month, the New York State Comptroller's office reported that in 2010 Wall Street paid an estimated $20.8 billion in bonuses as overall compensation rose 6%. Profits, however, showed a declining trend during the year.
The proposed oversight is not overreaching
Given these circumstances, the proposed oversight on executive pay does not appear to be overreaching. High unemployment figures and a shaky economic recovery make Wall Street bonuses unpopular.
According to a Bloomberg poll, nearly 70% of Americans believe that these bonuses should be banned altogether while only 7% say that bonuses are justified in the circumstances. The poll showed that nearly 76% of the Republicans, who tend to be skeptical of business regulation, were in favor of banning bonuses paid to executives at bailed out firms.
With one hand on the public pulse, the SEC's actions appear to be an attempt to fix responsibilities. Whether it's Washington's attempt to tighten its grip on Wall Street remains to be seen, but paydays in millions isn't a way to reward executives for their recklessness. Therefore, trapped between the need to retain executives and adhere to the SEC's regulations, banks have to walk a tightrope. Although plenty of zeros would still remain, banks need to scale back on these practices because, after all, Wall Street is not supposed to be a casino.
Avishek Mishra does not own shares in any of the companies mentioned in this article. The Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo. Through a separate Rising Star portfolio, the Fool is also short Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.