Wall Street Bonuses — A Reality Check: Executive Compensation is More than Just Rewarding Ability


Is the employee or the employer really the decisive contributor to the money they made?

How much were the resources and vast assets of a brokerage company the basis for its ability to earn large bonuses? What really matters in a time of financial implosions is to distinguish between the value of the institution and the value of the individual when contemplating bonus irrationality. There are two ways to measure contribution: total compensation received or opportunity cost measurement.

How Large Bonuses are Justified

Many who read that Wall Street payouts were generous believe the bonuses were tantamount to theft. What exactly is the value of the contribution persons like the senior management at Merrill Lynch who drove that institution into ruin and to the arms of Bank of America while pocketing over $200 million dollars for less than a year’s work? How is value discerned and derived? The Wall Street paradigm is to pay bonuses on an annual basis for production or net measurable benefit to the firm. The system was written by themselves for themselves. Value to the franchise was undefined but payments to management were nearly tamperproof.

Bonuses Do Not Reflect the True Cost of Business

Merrill Lynch, according to USLaw.com, pays representatives on a sliding scale based on annual production that does not include provisions for lawsuits, nonperformance, or success fee payments. Thus, the performance of the individual is not evaluated with respect to harm caused but not realized during the time in question. Nor is harm caused by the internal credit and security services a cause for payment offsets. The net effect is that aggressive brokerage activities are condoned as a cost of doing business. The implicit assumption was, until recently, these costs could never overwhelm the fantastic profits Merrill Lynch made. Thus, the strategy of the firm was to ride a hot market as long as they and the industry trends were profitable.

The Measure of an Executive’s Value is Opportunity Cost

An executive’s value is different from that of the commission salesforce and support staff. Compensation for the latter is directly related to the added value to the company he or she creates. The cumulation of good judgments provides added value to the franchise in terms of stock valuation, name recognition, and increased penetration and profit opportunities. Thus, the true value of an employee is to measure what contribution they make without the benefit of the previous franchise.

Can an executive who is able to take advantage of great leverage able to reinvent themselves when credit is scarce? Can an executive who finds possible opportunities create measures to exploit new and more profitable circumstances without the presence and strengths of the firm? It is final realizable value, not the year end point in time measurement, that determines an executive’s value. Executive compensation is the difference in real profitability that would be lost were he or she not there. Compensation and value are not always related.

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