In New Dilemma, Banks Cite Two Paths to Disaster
Friday, March 20, 2009
Some bank executives warned yesterday that the government is forcing them toward a disastrous choice between accepting restrictions on compensation that could cripple their ability to compete with rivals, or returning billions in federal aid, which could retard lending and damage the economy.
The possibility of a newly weakened banking industry also raised concerns among businesses in the wider economy that already are struggling to find financial firms willing to lend them needed money.
"We're all going to lose on this thing," said an executive at a large bank that took federal aid. He and other bankers expressed shock at the rapid progress of legislation that could impose large pay cuts on thousands of workers, and dismay that the industry is at the mercy of an angry Congress.
Some members of Congress, however, said those concerns were overstated and that limits on pay schemes tied to short-term profits were long overdue.
A wave of public fury, which is driving the bills before the House and Senate, was unleashed over the weekend by reports that American International Group had paid $165 million in retention bonuses to employees at the unit that gutted the company and forced a massive government intervention.
The legislative action could trigger the unraveling of the broader federal bailout of troubled banks, which has grown increasingly unpopular on Capitol Hill and across the country.
The problem is that bonuses play a central role in the way that banks compensate their employees. Almost everyone on Wall Street gets a bonus at year's end. While most American workers are compensated primarily by a fixed annual salary or through regular commission payments, people who work in the capital markets receive the majority of their annual income in a lump-sum payment based on their performance, the success of their unit and company profits.
Paying bonuses allows firms to tie employee compensation to performance in a given year, something management experts have long regarded as a good practice. But some experts believe that tying bonuses to short-term results encourages employees to take risks with long-term consequences.
The bill passed yesterday by the House would impose large pay cuts on thousands of employees at eight of the nation's largest banks, according to compensation experts. The version pending before the Senate would force dozens more banks to cut the pay of thousands of additional employees.
"This isn't a bill aimed at executives," said Alan Johnson of Johnson Associates, a compensation consulting firm. "If you're an experienced professional, there's a real good chance that this impacts you."
The average bonus for a Wall Street employee in 2007 was more than $180,000, but top employees make much more. Lloyd Blankfein, the chief executive of Goldman Sachs, topped the charts, collecting a salary of $600,000 -- and a bonus of $68 million.
Financial historians say such payments are rooted in the days when Wall Street firms were partnerships, and the profits were divided among the partners, but the practice has long outlasted the conversion of all the larger firms into publicly traded companies.