In a follow up to my earlier post regarding Senator McCaskillâ€™s drubbing of Wall Street executives, I wanted to give some perspective on the world of Wall Street bonuses. As I have said before, I am a proud former Merrill Lynch employee. At least at Merrill, there was very much a sales mentality that affected how people were paid regardless of whether or not that person was in a sales role. So, even for none sales employees, the annual bonus was very much an important part of a personâ€™s compensation. As an example, in my final year with Mother Merrill, my annual bonus made up 37.5% of my compensation. So, in my case, the bonus was incredibly important for my familyâ€™s financial well being.
With that said, we non-executive employees were always told that bonuses were not guaranteed, and we should expect that they could be as little as nothing. We were told that the bonuses were based on several factors; first the performance of Merrill Lynch as a whole, then the performance of our business unit, and then our individual performance. That first criteria is what has me (and I think the rest of the country) really confused about how Merrill and other firms participating in TARP could possibly have had any money in their bonus pools to distribute to their executives and employees. If the companies were not profitable, how in the world did they have money in their bonus pools, and if they had money in their bonus pools, why would they not move it to their operating accounts to improve overall financial performance for their shareholders?
While I do not approve of the decisions the Wall Street executives made regarding bonuses (I am a shareholder after all), I have an idea about why they had to pay out the bonuses. If they had not paid bonuses at or near normal levels, the firms would be facing a massive exodus of high quality non-sales employees. You see, as was the case with my compensation and the compensation of others I worked with, the base salaries offered to non-sales employees were lower than those offered by other companies. It was the hope of a significant bonus and the prestige of working for a top firm on the Street that drew people to work for the big Wall Street banks.
If these companies are to survive and prosper, they must rethink and revolutionize the way they pay their non-sales employees. If they offer base salaries that compensate people for what they are worth, the bonus can become a true bonus, and there will be no pressure to hand out any bonuses when times are bad like they are now. This is something that should have been done years ago, and as a non-sales employee, I often spoke with co-workers about how I would have preferred being paid a competitive salary and offered little or no bonus. A lot of people felt the same way. Now, the firms may be forced to do something along these lines to regain the trust and faith of the American people.