The Banking and Strategy Initiative

Bonuses after the bailout | Advantage Banking

Well we’ve crossed the pond now and landed firmly in Geithner territory. A silent Geithner, a shell-shocked Henry Paulson and the renominated Ben Bernanke may still be available for the Oversight committees , the Senate Banking Committee and many more that will discuss Executive pay again. It is unlikely, that any of them would overtly defend the banks anymore, it being in opportune and in many cases, much like the proverbial Throwing the Axe on your own foot or as an early commentator on Forbes on the same subject mentioned, We need a bigger 2X4 for this smack down.

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UPDATE: GS 5 member executive incl. Blankfein gets 19,460 stock units vested every year for the next 3 years for a total of $8.99m value . JPM major Dimon finally gets $17 million this year.
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The bonus is equitable because it divides the profit amongst those who created it as due compensation and then rewards the shareholders. The bonus is unfair because the shareholders, especially the Government does not want such disparity between the bankers and the others.

But enough of the blabber that may be required by a few still willing to learn. The facts on the ground are that the bankers and the investment bankers/traders are already treating this as a board game where they are equal or bigger than the government that just saved them That is why it is unlikely to be a reliable business model. Some have moved their bonuses to 95% stock based bonuses. Some others have discovered an argument at a competing bank that they will shadow. Yet others would simply resign as of now and find some one who will give tem a new bonus. But I do not see any of them even trying to clamp bonuses forever.

It is therefore fair that these bonus contracts now be re-written for transparent performance criterion . They be made part of risk disclosures by the bank. It is also time that the entire bonus pool be redistributed to base pay and a different culture sought for these banks. It is also time to ring the bell for Curbs on Proprietary trading because leveraged positions are a direct concomitant of high performance based pay.

The currency of the profits of a Goldman Sachs however are the trades it makes, and that will demarcate winners from losers always. I am actually thinking of Executive Pay being a little too high in this merry competition to keep the best talent. I find Geithner’s package at the Fed will survive as a benchmark by the end of this decade. It is a good idea. But I have been through the same argument here in India, and once the argument gets currency, it starts raining on all the talent, the good and the bad and then us middle managers have to pay for the paper castles HR and C&B specialists dream up for the ones above and the entry level staffers and junior managers. Seriously, it isn’t that simple.

More statistic based analysis will follow..

The London tax has been provisioned by most who announced result last week. I think it would even be extended after April. But only because we at the government are  little broke right now. We paid you all remember, and we kept paying thru two different governments.

Bonus Status:

1. AIG has recovered most of the $41 million excess paid out last year, the day after the $181 bn bailout (paid to GS originated and own portfolio securities) The Payout would thus be $26milllion short of the $195 m in March, of which $20 million cuts have already been accepted

2. Accrual rates and payouts for retention bonuses have dropped to the low 40s, JPM even taking it to 35%.

3. Morgan Stanley – (NYT Jan22)

In a move to deflect criticism, Morgan Stanley firm had already created a pay program for its top 25 workers, paying them mostly in stock and deferred cash payments and tying a fifth of their deferred pay to metrics based on the company’s later performance.

In addition, the bank had said that the bonus for Mr. Gorman, who took over as chief executive on Jan. 1, would be paid entirely in deferred stock, with no cash at all.

Morgan Stanley emphasized that Mr. Gorman had also foregone his bonus in 2008, when the bank struggled. It had also already announced that John J. Mack, the firm’s outgoing chief executive, would be accepting no bonus for 2009, the third consecutive year that Mr. Mack has foregone a bonus.

4. Lloyd Blankfein has reduced the bonus to him at Goldman Sachs , not taking cause with the government or the largest Institutional  shareholders after they threated legal action. 200 new Managing Directors geto to the preium pool with extended resposibilities after a stellar year. Even in 2008, 94 partners were made( Baz Hiralal, Dealscape)  and in 2007 299 were made Partner MDs.. The payout i expected to average $480000 per employee, Lloyd Blankfein’s 2007 bonus was a record $67 million at the time. GS role in the crisis was to receive the counter party pyments from AIG onthe defaulted notes and mostly tarde the FI market in the first three quarters

Banking contracts are still signed by job seekers and successful candidates for a pay in which profit redistribution from the end of the year is the number to live by. And then leverage still is. If a salary contract promises cash, at least 40% in the bad times and more tan 60% in the good times would be spent the day the promise is accepted. Thus it has been untenable until now to discuss bonuses with the banks and the bankers.  What will change now? The fact that investors and fellow citizens would remember that you are not really making any profits this year.. the ones who returned the monies going into deep losses such as these at Bank Am and Citi . However, given the level of noise and the affront to the bankers and in talking to others in public forums there would not be much discussion about this very secret component of one’s self-esteem

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