In Praise of Bonuses

From Bloomberg.com today

Wall Street Workers Still Get Bonuses, Many Unhappy, Poll Finds

By Christine Harper
Jan. 27 (Bloomberg) -- About 79 percent of Wall Street employees responding to an online poll this month said they received a bonus for 2008, more than the 66 percent who expected to get a reward in October, according to eFinancialCareers.Com.
Of the people who said they received a bonus, 46 percent said it was higher than last year, eFinancialCareers, a unit of Dice Holdings Inc., said in an e-mailed statement. About 900 U.S. users of the financial jobs Web site responded to the survey conducted Jan. 7-12. In October, 1,300 people responded, and 36 percent said than that they anticipated a higher bonus.
Wall Street’s system of paying year-end bonuses to reward workers is under criticism after the worst financial crisis since the Great Depression led to record losses and forced the government to pump taxpayer money into banks. Still, 46 percent of people responding to the poll said they were dissatisfied with their bonus.

Of course they were. Bonus has become a 4 letter word in the financial sector, as the public increasingly envisions Wall Street employees as rich folks taking taxpayer handouts. The fact is that Wall Street bonuses aren't a year end prize for low to mid-level employees, but rather an important part of the comp structure and a tool for making a large part of their cost structure variable rather than fixed. Compensation costs typical run at 50% or so of revenues at these firms. An employee making on average $400,000 might have a base salary as low as $100,000. If the job is worth more than $100k, which it most certainly is in the eyes of the employer, paying zero bonus in a bad year makes no sense if the firm wants to keep that employee.

Going to a system of higher bases and lower bonuses would surely increase the already high volatility of employment numbers at these firms, which nobody wants to see.