Wednesday, November 19, 2008

The End of Bonuses

The other day, the top executives at Goldman, one of Wall Street's consistently most profitable investment firms, announced that they would be forgoing their year-end bonuses in light of the current financial situation.

What's remarkable is that this amounted to news. Not just any news, but lead story with blaring headline news in the Wall Street Journal.

Twenty--or maybe thirty--years ago, bonuses were really tied to performance. If a company had an exceptional year, executives would receive bonuses on top of their regular pay. Everyone knew that if their company went back to having just an ordinary year--or a bad year--then the bonuses would disappear.

Along the way, the "bonus" concept became corrupted. During the 1980's, there were so many good years that every year, it seemed, was exceptional and merited a bonus. Bonuses became a greater share of compensation than "regular" pay.

Before long, it went like this: if it was a great year, then the executives took credit for it. Pay no mind to the fact that a monkey could've made money easily in many of those years.

But, if it was a bad year, well, that was different. Then it wasn't the executives' fault. It was due to "economic circumstances beyond our control."

So what happened was that if it was a good year, you got a bigger bonus; if it was a bad year, you only got the same bonus as in the previous good year--a real hardship. The bonuses, of course, were all ridiculously large, and lots of people who had demonstrated little skill other than to follow the herd into the market were rewarded with astounding amounts of money.

[It works that way in the law profession, too. Lawyers complain endlessly about how hard they work. They ought to try working in a real job--like being a paramedic--where there are no bonuses.]

The Goldman executives are doing the right thing. No one on Wall Street deserves a bonus this year. In fact, they ought to have to cough up the bonuses they made over the past five years, especially if they "earned" them pushing investments like collateralized debt obligations and other instruments at the heart of our current economic malaise.

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