Why Failing Companies Still Pay Bonuses

(CBS)  Many people can't understand is how failing companies can pay out staggering bonuses - often to the very employees who got them into trouble in the first place.

But Wall Street firms say bonuses are an important incentive for employees. Although some work better than others, as CBS News chief business correspondent Anthony Mason reports.

It's the way Wall Street has done business for decades: Rewarding it's star producers with extravagant bonuses - more than $18 billion last year, an average of $112,000 per worker.

Those bonuses have recently come under widespread criticism

"The problem is the incentive structure," said Rep. Barney Frank, D-Mass. "Heads they win, tails they break even."

On Wall Street, you earn a bonus for delivering business, even if the company has a bad year. The banks say those incentives helps them lure and motivate their top talent.

"Incentives work when they're designed appropriately," says David Wise, a compensation consultant.

Wise says that the good incentives keep executives working in the company's best interests; reward long term performance; and, most importantly, don't pay out when the company fails to perform.

"And most of the incentive plans in America usually fail one of those three tests," Wise says.

"The bonus structure on Wall Street has contributed mightily to the global financial meltdown," says University of Maryland economist Peter Morici.

That's because those bonus plans gave Wall Street bankers the incentive to take irresponsible risks, Morici says.

"If you do that with a banker he becomes inclined to write bad mortgages and write bad loans simply to have the volume of loans he needs top pay the big salary that he wants," Morici says.

After losing more than $50 billion last year, UBS, the Swiss banking giant, admitted its bonus system was broken. Its solution was sweeping reform. UBS executives will now have their bonuses deposited into an account. Only a third can be withdrawn annually. And if the company suffers losses the next year, UBS can take some or all of the money back.

"So you can't just have one great year and walk away with a huge bonus and then not care about what happens over the next few years," Wise says.

Other companies are now looking at the UBS plan as a model for reform.

But everyone agrees the AIG model was a disaster.

More AIG Related Coverage:

AIG CEO Seeking Return Of Some Bonuses

Fake Outrage? AIG Bonuses Known Months Ago

73 AIG Bonuses Hit Million-Dollar Mark

Excessive Righteous Indignation Over AIG

Anger Over AIG Depletes Obama's Capital

Obama May Restrict AIG Bailout Money

[jaymo62]

From the rich, for the rich. The only reason why companies pay bonuses is because they choose to. Hopefully, after all the dust settles, corporations and the stockholders will understand that the amount of money the execs make in wages, bonuses, and all other forms of compensation is unrealistic, grossly inflated, and has cost this country enough. When executives are truly worth the money they have been making for years, then maybe - and only when deserved, should they make fortunes. Until then, let supply and demand and real worth determine what that should be. Stop playing the anti-Robinhood for your own benefit. America is tired of it - or do we need a civil war to be heard? That is about the only thing that we haven't done. It seems to me that we have screamed loud enough and clear enough for the entire world to understand. Why Board of Directors aren't getting it is beyond me.

[payasyougo]

"Why Failing Companies Still Pay Bonuses"
----

Wall street is just following the model utilized by our government.

Compensation has no relationship whatsoever to the job performance of the individual or the fact that the entity as a whole is operates at a loss.

[goingforward_]

The banks say those incentives helps them lure and motivate their top talent.
This is where they got it wrong.
Staring at Unemployment is the incentive to motivate top talent.
Rewarding some people, when collectively failing as a corporation negates the idea
that teamwork and common goals have any importance whatsoever.
American taxpayers say' "No bailout for you!".

[Tarponsprings]

"The problem is the incentive structure," said Rep. Barney Frank, D-Mass. "Heads they win, tails they break even."

Hey Barney, I thought your above comment was about all of you bums in the U.S. Congress. You and your cohorts ( Dems & Repubs) allowed AIG and others to take all of these risks by not doing your job and regulating them. AIG & others have done nothing that you and the rest of our esteemed Congress has done in the past...Congress has failed in their job, and just got another automatic pay raise. People who live in glass houses should not throw stones.

[govtguy]

Hey, here's a thought: For those AIG executives who "decline" to return their extra gratuities, their name and photo(s) ought to be published worldwide so the AIG customers can see who these thieves (oops, miscreants) are. Fair is fair, as a US citizen, now a shareholder in the AIG corporation, I demand to know who my bailout money is going to, and want them to elucidate exactly what they did to "earn" this misnamed bonus. Congress - you listening? Mr Geithner - you payin' attention?

[J_G_H]

The retention issue is largely bogus. There are plenty of cases in which executives have collected the bonuses and left anyway. In fact, if I had collected four million dollar bonuses for four or five years, I would be looking at early retirement. Excessive bonuses are an incentive to the greedy to be reckless. \
There is also the issue of whether the recipients are indeed worth retaining. I have no problem with giving a reasonable (tens of thousands max) to an AIG employee who made money for the company, assuming the ocmpany still made a net profit on the deal, but the bonuses at issue are to the unit which caused much of AIG's losses. Not only should many of these people not get bonuses, they should count themselves lucky to have a job.
This brings up one more issue for the media. Name names and track which companies have hired the alumni of this debacle. Both customers and shareholders deserve toknow if the leaders of a company have such low standards as to hire these losers.

[rickwar98]

Shut up you liberals! Bonuses are an important incentive for executive employees! Especially when the company is losing money!
Posted by Harry_Snapperorgans at 5:58 AM : Mar 19, 2009

Right-----and you have a lot of grey matter missing

[marine1957]

I suspect that corporate bonuses are neither for good work nor for retention. What something is in fact, is all-too-often not what it called by deceitful men.
.
Rather, I think that the bonuses at the top of the ladder are because CEO's etc. have discovered that they can, in their lust for money, write their own checks.
.
Down the ladder, I suspect that bonuses are bribes/payoffs to keep those who discover what the higher ups are doing, quiet (hush money) about the illegal scams and accounting hoaxes being perpetrated by said higher ups.
.
Ref: The recent arrest of Madoff's accountant, Friehling, who was paid $12,000 to $14,500 a month for his meager and slothful services to Madoff.
.
Bottom line:
Go to now, ye rich men, weep and howl for your miseries that shall come upon you. Your riches are corrupted, and your garments are motheaten. Your gold and silver is cankered; and the rust of them shall be a witness against you, and shall eat your flesh as it were fire. Ye have heaped treasure together for the last days. Behold, the hire of the labourers who have reaped down your fields, which is of you kept back by fraud, crieth: and the cries of them which have reaped are entered into the ears of the Lord of sabaoth. Ye have lived in pleasure on the earth, and been wanton; ye have nourished your hearts, as in a day of slaughter. Ye have condemned and killed the just; and he doth not resist you.

[ramos1129]

Wall Street has to learn the new ways of doing business.

1. There are millions of professionals out of work and many are located in NYC.
2. Assume I was still employed at AIG or Goldman Sachs, or whereever. I would do my best to be as
useful to my company bonus or no bonus. I have bills to pay and need the income.
3. Assume I am an unemployed wall street ex-staffer (there are thousands in NYC). The moment I learned that someone was leaving because he/she had not gotten his/her raise and/or bonus, I would do whatever it took to fill that slot.

It would take a very foolish person to leave a good income in today's job market.

[lost_america]

I have done 28 years in corporate American.

When I entered in 1980 bonuses and incentives came when your came up with innovative ways to do a better job for your customers first, then your employees.

People bought your stock because that thought your product or service was a good idea.

Now in 2009 as those of us ?old school? types are being forced out things have changed.

Now it is all about the stock. Screw the customer. Screw the employee. Stock holders rule and they don?t care about your product, all they care about is your profit.

So what if you have made money every year for the past twenty, you did not make enough. We want more. The easiest way to make more is to cut headcount and offshore jobs.

That?s how we get our bonus now.

(July 31st my job goes to Bangalore India)

And, Executives sit on each others board and vote each other raises to the tune of an average of 30% a year increase.

As the song goes:

And don?t think that for one moment we don?t understand your pain
as we don our golden parachutes and tumble off this plane.
Don?t forget we told you these things just go around in phases
We?ll continue on each other?s board and vote each other raises.