Pay and Wall Street Executives

The news has been filled with discussion of Walt Street executive bonuses. Each of these executives received their bonuses even though their companies were failing and now receive special federal government funds. The executives have been attacked for the huge size of their bonuses, but the attack is probably misplaced. It is the boards of these companies that deserve our criticisms. They make the decision how to compensate executives. Once the form of bonus is determined and how it is to be earned, these boards are contractually obligated to provide these bonuses.

Of course, the boards could have tried to renegotiate, and, of course, the executives could have offered to not take the bonuses. But neither took place.

The reason for providing these bonuses, at least as portrayed to the public, is bonuses are needed to retain these executives. Many on Wall Street are underpaid, comparatively speaking, to other executives, and the bonuses make up for low pay. But there’s the rub. Bonuses are supposed to be a form of pay for performance. The better you do for the company the more money in stocks and cash you are paid. Thus, the more successful the company is, the more of a bonus the exec should be paid. So if a company is going under, then the exec should receive nothing.

The Board shouldn’t want to retain the executive. There is no need for a retention bonus nor a bonus to make up for lower pay. Surely, there are other employees in the company or in another company who might like the opportunity to bring back the company from this down time.

Bonuses or other forms of pay for performance do tend to make people work hard, at least initially, but then employees grow to expect them year after year. They become complacent. The bonus has to increase and increase spiraling well beyond what will motivate, if indeed it is motivating. Given that these bonuses seem to be largely unrelated to how well the company is doing, they are incredibly absurd as an incentive for these Wall Street executives.

It is time that boards begin to recognize what they are doing and take responsibility. They have a fiduciary responsibility to manage the company properly. Though those of us looking on must feel these bonuses are immoral and unethical, it is likely that the executives feel some guilt about receiving these bonuses, but after the guilt begins to diminish, I’m sure they are busy spending them and expecting to receive another next year. Given that we have not heard of boards taking responsibility for this financial mess and executives giving back pay, it may very well be that the future legislation must micro manage and figure out means to restrict bonuses. When a government agency does wrong a consent decree is established giving a court appointee representative the right to oversee the activities of the agency. This is an extreme response, but maybe we do need an appointee to work with these boards to help them understand their responsibilities to their shareholders and the public.