Monday, March 23, 2009

A few thoughts...

At this point, pretty much everything that one can say about the bonus bill has been said. It's way too broad a piece of legislation, doesn't actually fix the problems underlying the compensation models at these firms, will only encourage firms to shift a bigger portion of pay to salary (if it actually gets passed), etc. That said, there are a few things I did want to point out:

  • A number of people have suggested that part of the reason people are upset about the bonuses* is that they simply don't understand how salaries and bonuses work on Wall Street. The "public", the argument goes, equates a bonus with a reward for good work, so it's easy to see why they're upset. But surely, if the public knew that a majority of a banker's pay came from his bonus and not his salary (therefore making a bonus like a de facto salary), people would be more sympethic, the people sticking up for bankers say.

    I'm going to go out on a limb and say people would be just as upset if the banks were spending millions to pay salaries instead of bonuses. Average people are pretty shocked to learn you can make so much money simply moving pieces of paper round-and-round.

  • There are also a number of people (such as Nate Silver, for instance) who have pointed to examples where bankers/traders might actually deserve the money they make, especially in cases where they better the public good. I'm fairly certain these are the exceptions rather than the rules. Certainly -- like all professions -- there are people that are very good bankers, but most are mediorce or just plain bad. Remember their motivations for getting into the business -- to make a lot of money, not to save the world. My sense is that if you could really rank most Wall Street banker's priorities when doing a deal, they'd go something like this:

1.) Banker
2.) Banker's friends at his firm
3.) Banker's firm
4.) Banker's friends at other firms
5.) Other Wall Street firms
455.) Banker's neighbor
956.) Banker's pizza delivery guy
1875.) Banker's client

* When at Yale for a quiz bowl tournament in high school, a Yale quiz bowl team member made a big point about saying the plural of bonus was boni. Apparently, that is incorrect.

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