As regulators and shareholders sift through the rubble of the financial crisis, questions are being asked about what role lavish bonuses played in the debacle. Scrutiny over pay is intensifying as banks like Merrill prepare to dole out bonuses even after they have had to be propped up with billions of dollars of taxpayers’ money. While bonuses are expected to be half of what they were a year ago, some bankers could still collect millions of dollars.
Critics say bonuses never should have been so big in the first place, because they were based on ephemeral earnings. These people contend that Wall Street’s pay structure, in which bonuses are based on short-term profits, encouraged employees to act like gamblers at a casino — and let them collect their winnings while the roulette wheel was still spinning.
“Compensation was flawed top to bottom,” said Lucian A. Bebchuk, a professor at Harvard Law School and an expert on compensation. “The whole organization was responding to distorted incentives.”
Either investors should be able to pursue recovery via litigation, or the SEC should go after the ill-gotten cash.
Either way, Bonuses based on profits that were not real are not bonuses — they are the proceeds from theft, and as crime, should be disgorged.
CEO Clawback Provisions in the Bailout? (September 2008)
Citi Bailout (November 2008)
On Wall Street, Bonuses, Not Profits, Were Real
NYT, December 17, 2008