Should bonuses be paid to employees of companies which almost went bankrupt but didn’t because the company took bailout money from the government? Most bankers say yes, yet to the general public, this seems to be absolutely inexcusable. I decided to look into this topic further to satisfy my curiosity.
The large banking businesses are in many ways at blame for the current recession. They lobbied for, and got, the relaxation of rules limiting how much debt they could have. By going into greater debt, they could increase their profits. However, this also greatly increases their risks. When the economy began to decline, these companies suddenly were not able to pay back their debts, which made a huge impact upon the economy. This trickled down throughout the entire economy, which relies upon loans and investments to keep working. The government had to step in and passed a “bailout” for these large companies in order to keep the economy from getting worse, but the damage was already done (Labaton).
The general public is angry at the banking industry because of the damage they did to the economy, which affected the entire country. The public also feels that these companies are in a debt to the public because the government had to bail them out with taxpayer money. Therefore, the public expects the banking industry to be humbled, and being extremely frugal right now. Yet, these companies are gearing up to pay out large bonuses to their employees. The companies seem to be returning to the very same ways which brought about this recession (Kaiser). As Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University says, “It is setting us up for another fall,” (Eder). In this situation, it is not hard to see how people are angry at the banking industry.
The banking industry has taken some steps to deflect some of this popular resentment. A popular step is to restrict cash bonuses. Instead, bonuses consist of mostly stock. For example, Morgan Stanley CEO James Gorman is taking his bonus solely as company stock. At today’s market value, the stock is worth about 2.7 million dollars, but if he performs well, the value can be doubled to 5.4 million in two year’s time. If he performs poorly, however, they can be revoked (Gary). This is called a “clawback” clause.
Clawback clauses in executive bonuses are becoming more popular. Partially, they exist to deflect some of the popular resentment at executive pay. The main reason, however, is to reduce risk. The perception is that bankers are more likely to take large risks because in the short term, they are more likely to receive a large bonus. If that risk fails in the long run, then it doesn’t hurt the banker himself, since he already got his bonus. With the clawback, the company can demand the bonus back if the risky investment fails in the long run, making bankers less likely to take large risks. These are still untested, being a relatively new concept. Additionally, it can...