New US bonus rules make big salary increases look inevitable

14 February 2009

1 minute read

New US bonus rules make big salary increases look inevitable

It's the weekend and it's Valentine Day, so we'll be very brief, but in case no one noticed, the new stimulus packaged passed by Congress on Friday night is substantially more punitive than its predecessor.

The main points are -

- Bonuses for 'executives' at all institutions receiving government funds (including those that have already received funds - rather than those that receive funds in the future as was previously the case) to be restricted to no more than one third of annual total comp.

- These bonuses to be paid in stock which can only be sold when the cash lent by the US government has been repaid in full.

Only high earners will be impacted

The good news is that only the top five executives and the twenty highest earners at organizations receiving more than $500m (ie. Goldman Sachs, Morgan Stanley, JPMorgan, Citigroup, BofA) will be affected by the rules.

Clearly, no one will want to be in this cohort. Equally clearly, a new bracket of super-salaries is the inevitable palliative for anyone in danger of falling into it.

AUTHOReFinancialCareers UK

Insider Comment

SA
SABRINA
9 March 2011
I THINK IT SHOULD BE BANNED
Reply
J
J
15 February 2009
Michael,
Ban bonuses altogether and give public-sector wages to any company that's received government loans?!! What a stupid idea! So an investment banker goes from 500k a year down to 25k? How many do you think will do that? Any self-respecting banker will jump to one of the many firms that haven't had a bailout - yes most the big banks aren't hiring, but there's a plethora of smaller brokers, dealers, trading houses that are hiring right now. Or just do an MBA, law school etc, leave the industry. What motivation do people have to turn things around if they're not getting paid to? So you'll have the top talent leave (again should be reiterated many profitable bankers are 'talented' and only a small minority lost huge sums), the rest too demotivated to do a good job.
Instead if you promise generous bonuses that are in deferred cash or stock which can only be received once the bank has turned things around and paid back the govt, you may actually see a turnaround rather than banks never getting back on their feet.
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qu
quantisnotdead
15 February 2009
State Street and BoNY will be impacted, too, as well as their asset management branches (SSgA, etc.). Despite being custodian banks, their bonus payout distribution tends to be at least as skewed as investment banks, i.e. 80% of the bonus pool goes to the top 20% staff. I agree that these measures won't change much to top exec compensation, who will just see their basic salary increase as their bonuses decrease.
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Pe
Perry
15 February 2009
What about BoNY and State Street i.e All eight TARP executives?
Reply
Mr
MrMajestyk
15 February 2009
"Equally clearly, a new bracket of super-salaries is the inevitable palliative..."
In reality this won't be the case. Like any business the top management want to maximise end of year net profit to get out of this mess. If you increase the fixed costs (i.e. fixed salaries) of the business when the revenue is variable, then you are shooting yourself in the foot. With the increased salary model it will also take a lot longer to payback the government funds and become independent and private again. Dominic's point about company cars, big offices etc.....they got that in the good times anyway. Dick Fuld and his most senior executives travelled exclusively by private jet owned by Lehman. Same for Citigroup under Sandy Weill and remember John Thain's "commode on legs"? They will cut all that out this time.
No, I expect to see this rule work as intended to. When the bank is profitable and healthy again, I am sure the top performers can sell their restricted stock at a big profit in the market.
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