What is the truth about Wall Street bonuses?

There is, of course, this tremendous outcry now about AIG paying huge bonuses again after the U.S. taxpayer had to provide it with billions of dollars to keep it from going belly up last year. Too big to fail. Are these bonuses being paid out of taxpayers money to the same guys who took all the outrageous risks and brought down the world wide economy as a result? Probably yes, I would guess, since money is fungible, as they say, and no one, apparently, had the presence of mind to require that the taxpayers' money be used for something other than bonuses or require that the funds be tracked in any way.

How could AIG management have the unmitigated gaul to declare such huge bonuses once again with this background?  Are they so insensitive to the public outcry that they would basically spit in the eye of the populace, the public be damned. Well, there may be some of that because anything is believable from some of these guys. But it probably isn't quite that callous because, as I understand it, current compensation schemes at the bulge bracket banks and humongous insurance companies (e.g., AIG) are the subject of enforcible contracts.  I hear lawyers generally feel that these contracts are valid and enforcible and the banks and/or insurance companies may be out a lot more after settling the ensuing myriad lawsuits for breach of contract than if they owned up to the contractual bonus commitments.

Now you may argue that contracting up-front to pay these huge bonuses to people is crazy. Well maybe so, but as I have said in previous posts on bonuses, this is standard practice at risk oriented institutions like investment banks and has been for many years. This is the so-called asynchronous compensation system which pays such bankers relatively low base salaries and then large bonuses to those who hit home runs during the year with smaller bonuses to the single, double and triple hitters.  The fact is that someone in this system for a while who has done well often has created a standard of living for him or herself that makes achieving these bonuses a must. As Gardner Bannion tells Farley in The Bonus: "You know this business. You and I live on bonuses. We'd starve on our salaries." And so you may argue with the system (and I do), but the large bonuses are paid to the big hitters for having been "rainmakers," or having closed some huge deals during the year, rather than just dividing up the actual profits for the year among a large group of employees - the common understanding of bonuses. I suppose the question to be asked is whether total compensation paid by AIG or the large investment banks is all that much greater than any other large corporate enterprise with similar revenues and profits? If it isn't, then maybe the singling out of these "bonuses" as though they were paid to people who already earned huge salaries during the year (which we know is not the case, relatively speaking) could be politically motivated. You think?

The bottom line though, it seems to me, is that this system, which pays extraordinary amounts to people who do extraordinary things during the year can lead to the taking of risks, which would never be taken by people being paid under a more conventional compensation regime.  As we have now clearly seen, taking extraordinary risks can lead to extraordinary failures and I would indict the asynchronous compensation schemes as the real culprit.