Why Failing Companies Still Pay Bonuses

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 Only a third can be withdrawn annually.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
    • Anthony Mason

      CBS News senior business and economics correspondent; Co-host, "CBS This Morning: Saturday"