This spring, at the height of the outrage over excessive Wall Street bonuses and bailouts, the progressive Working Families Party organized a protest that promised to be explosive. The group chartered a bus and invited people to come and picket outside the multimillion-dollar suburban New York homes of AIG executives, whose company had just been bailed out by U.S. taxpayers. Populist sentiment was building across the country, and expectations for a big turnout were high. I was fascinated as I took my own seat on the bus: Finally, the American public seemed ready to declare that things were going to change.
Nobody showed up. Reporters, who outnumbered protesters by about 5 to 1, came looking for the pay-outrage story that wasn't. Now, as bonus season rolls around, history is set to repeat itself: Banks are preparing to make huge payments to employees even though the established compensation system is seen as having been a major contributor to the financial crisis. Never mind that some of these companies wouldn't be in business if the government hadn't bailed them out.
In June, Goldman Sachs announced it had set aside $11.4 billion (all currency in U.S. dollars) for employee compensation, which on an annualized basis works out to about $770,000 per employee. (Goldman's CEO, Lloyd Blankfein, has reportedly been urging employees not to make high-profile purchases after the bonus money is handed out this winter-a sign that even he knows the whole thing is unseemly.) Meanwhile, over at government-supported Citigroup, management is fretting about what to do with commodities trader Andrew Hall, who is said to be owed a $100-million bonus for profits he generated at the company's Phibro trading unit (he could end up being paid in full).
And yet, more than a year into the worst financial meltdown this generation has ever seen, no one seems to care. While cable-news commentators have fretted about a public insurrection in response to the bonuses, it simply isn't in the American DNA to take up arms in objection to other people's over-the-top paycheques. The bonus system is firmly entrenched in banking culture. Finance is not a career that one pursues for spiritual fulfillment-it is all about the paycheque, and traders are as incentivized as ever to make wild bets and to maximize commissions, with no regard to whether the investments collapse months or years down the line. By then, it will be someone else's problem.
The Obama administration appointed a "pay czar" to monitor salaries at companies that are still on government life support, which is a step in the right direction. Given that we have to live with the bonus system, at least for now, regulators and Congress could make it less egregious by taking a few simple steps:
› Start by telling banks they can keep paying people astronomical sums of money if they want to. But if the profits on which those payments are based evaporate later on, the employees should be forced to give the money back. This is called "clawback," and it would be an effective check on irresponsible behaviour. No longer would traders be able to cobble together deals they know won't work; if the deals fizzle out, so will their pay.
› Place big bonuses in escrow to ensure that the companies and their people deliver. This is a benign approach to the clawback idea, putting some distance between the moment when employees do their deals and when they are paid.
› Spell out the pay for top executives and other high earners, and let shareholders vote on whether the amounts seem reasonable. While disclosure of executive pay has improved over the past decade, it's still the board of directors-often hand-picked by the CEO-which decides how much money management will make. Giving shareholders a say will force executives to consider whether their compensation passes the smell test.
› Ban bonuses at companies that lose money or receive government funds. If everyone benefits when things go well, they should all suffer when the firm falls into the toilet. Similarly, if the bank's performance is dismal enough to warrant government involvement, nobody deserves extra pay.
Will any of this materialize? Probably not. Congress and regulators have been tied up for months, bickering about regulatory reform measures and fending off finance industry lobbyists who are doing their best to water down the proposals. Meantime, the Wall Street machine is chugging back into action, setting the stage for future meltdowns to come.