by Alexander Wissel, Editor in Chief, Investment U
Dear Investment U Reader,
The outrage from AIG’s bonus disclosures is palpable. You can practically taste the anger. In many ways this rage is reasonable and justified. When President Barack Obama gave his speech yesterday, you could almost hear the millions of Americans screaming with him in just outrage.
Investment U strongly believes that pay should follow performance. We notice when a “turnaround specialist” takes millions while firing hundreds (or thousands). We pick up on CEO’s that add numerous “perks” onto their compensation that are above and beyond what counts as reasonable.
We also watch with disgust as these same individuals increase their compensation as their firms loses money. We know because these are the people that can kill what is otherwise a sound investment.
So when we hear about millions in bonuses being distributed from Government bailout money we feel the same, if not more upset, as most. We see a failure of our system to let these companies and their failed business principles die.
BUT. And this is a big but… But we also want to know more about the types of bonuses and what level of employees got them… And it’s not so we can figure out ways to get that money back.
When most of the country thinks “bonus,” they think of additional compensation for a job well done. And that is exactly how these should be used. Unfortunately, in much of Wall Street, bonuses mean something entirely different.
Think Clark Griswold from “National Lampoon’s Christmas Vacation.” For many in the financial establishment, bonuses are simply part of their compensation packages. They have no tie to performance at all. Much of the rank and file receives bonuses as a normal part of their “salary.”
It’s because companies use bonuses as a way to minimize expensive payroll obligations.
Think of it this way, if I’m an average corporation and I pay a qualified employee 100k as their salary, I am required to withhold taxes, insurance and a host of other items – in addition to setting aside money for federal programs. However, if I pay that individual 60k, and bonus 40k, the situation looks much better. The employee has to handle withholding taxes on the 40k and I am only required to deal with the payroll effects of 60k.
In states where unemployment insurance is high, and with the multitude of federal programs stacking on, an employer might have to set aside up to 30% (or more) of that individuals salary. In our example above, that would change our obligations from 30k to 18k.
Not a huge savings. But imagine that multiplied over thousands of employees. You would be looking at additional expenses of millions coming off your bottom line. For companies looking to squeeze the most out of their capital structure, it’s a logical choice.
I feel for the hundreds of employees that have done nothing wrong other than work for a failing organization who now find themselves subject to threats from politicians and states attorneys alike. These are the people who truly are blameless and who now find themselves the pariah for Wall Street’s problems – poster children for an American scapegoat.
Now we don’t know how much of these bonuses we truly “rewards” for poor performance, and how much were a part of the rank and file’s normal paychecks. But we shouldn’t rush to judgment until we know all of the facts.
It’s what rational people do, it’s what Americans do, and it’s what smart investors do.
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One Response to “The Hidden Side of Bonuses”
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March 17th, 2009 at 1:26 pm
Your article trying to justify payment of bonuses by conpanies who are losing money is total BS. The author must collect bonuses from his company.
If the taxpayers had not bailed out AIG and others, these people would all be out of work. Why pay bonuses to the very people who got you into this mess?
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