Wall Street Bonuses Take a Hit. Is That Good or Bad?

Wall Street Bonuses Take a Hit. Is That Good or Bad?

In 2011, the average Wall Street employee made $121,150 ... in bonus alone. And yet many of them probably found this figure disappointing.

Seriously?

Due to new financial regulations and economic hits both at home and abroad, Wall Street bonuses fell, on average, 13% this year—making this bonus seem small ... to the bankers.

The most surprising thing about this, however, might be that Wall Street handed out performance-based bonuses at all—since it didn’t make the sort of profit to justify them. Securities firms in New York made less than half of what they made one year prior.

In fact, though these firms only made $13.5 billion, they handed out close to $20 billion in year-end bonuses. So, how do they get away with paying out more in bonuses than they made in profits—and how could they justify handing out bonuses at all?

How Bonuses Are Awarded

In general, bonuses, or lump sums paid at the end of the year, are given by companies of all kinds and sizes. The sum paid out in bonuses is often written into employees' contracts: If you hit certain goals or target numbers, you can expect a certain amount in a bonus. They help an employer show appreciation of a job well done and allow employees to reap the rewards of a company’s success (when the company is successful).

On Wall Street in particular, bonuses help to motivate employees in two ways:

  1. Worker Retention. In an industry where workers often jump between different banks and hedge funds, generous year-end bonuses help retain talent. If you have a great year and receive a $1 million bonus, it’s easy to think you’ll be able to repeat that success—making it difficult to walk away.
  2. Risk-Taking. Bonuses are generally tied to short-term profits made by individuals working at the firms, which, according to The New York Times, “encourage[s] employees to act like gamblers at a casino.” The promise of major pay-offs at the end of the year can lead Wall Street workers to try to maximize their profits, often taking on huge risks. Before recent regulations were set in place, this, in part, helped lead us into the 2008 financial crisis.

Why Continue to Give Bonuses?

Despite flagging profits, Wall Street firms are used to giving out bonuses—and employees are accustomed to receiving them. Scrapping year-end bonuses would require entirely reworking the compensation structure at Wall Street firms as well as reimagining ways to motivate workers used to running after the dangling carrot of a bonus.

How Bonuses Help Us All

Many Americans are outraged by what they perceive as exorbitant bonuses being paid out to the professionals who got our country into dire economic straits in the first place. Regardless of how you feel about the fairness of this practice, Wall Street pay has huge effects on the economy—touching people with no connection to the financial industry at all.

Before the financial crisis, business and personal taxes collected from Wall Street activity made up 20% of New York state revenue; this amount fell to 14% last year. And in New York City in particular, Wall Street used to provide 13% of the city’s revenue; now, that number is closer to 7%. As the industry falters and bonuses drop as a result, both city and state are forced to do with less, which could affect taxpayer-funded programs and services.

On a personal level as well, less paid out in individual bonuses could mean less consumer spending on goods and services, which means that the people working in those industries suffer. (To find out how consumer spending affects the economy, read this.)

How Bonuses Hurt Us All

As we mentioned earlier, huge bonuses can lead to huge risk-taking--which can be dangerous for the economy as a whole.

As reforms like the Dodd-Frank Wall Street Reform (read more about it here) aim to make Wall Street a little less risky, re-imagining the pay structure at Wall Street securities firms would be right in line with those goals. So, while it would be difficult to get bankers excited about working without the promise of a huge pay-off, dispensing with bonuses might be better for the economy as a whole ... and for Americans not working on Wall Street.

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