Stop Celebrating Those 'Zero Bonuses'

Ever since the financial crisis, Wall Street bonuses have been in the spotlight. Some worry that the short-term incentives they provide cause excessive risk taking. But really, most people just think bankers make way too much money. So yesterday, when the New York Times ran an article about how "zero bonuses" would hit Wall Street, some naïve econo-pundits cheered. They probably want to hold their applause, because these zero bonuses will actually make matters worse.

So what are some of those celebratory comments? The Atlantic Wire provides a few. Here's one by Matt Taibbi:

"Break out the tiny violins. Some banksters are about to be forced to live on ramen and sadness."

Hardly. Such cheers are misguided. For starters, those who are excited about these zero bonuses failed to closely read what the Times article by Nelson D. Schwartz and Susanne Craig says:

In some ways, a zero bonus should not come as a surprise to many bankers. As a result of the 2008 financial crisis, Wall Street firms like Goldman Sachs and banks like Citigroup raised base pay substantially in 2009 and 2010. They were seeking to placate regulators who had argued that bonuses based on performance encouraged excessive risk.

So bank pay isn't actually declining -- it's just shifting its mix from a bigger bonus to a bigger salary. This is actually worse, for reasons explained here. In short, a bigger salary is essentially a guaranteed bonus paid throughout the course of a year. And anyone who hates big banker bonuses hates guaranteed banker bonuses even more. Performance will still be geared towards the short term, because each year, when an employee comes up for performance review, his or her salary will increase for the following year accordingly, instead of being given a bigger bonus. Nothing changes.

In fact, these zeros make matters worse. Here another excerpt:

While Zeros are turning up in the ranks of back-office employees and midtier bankers and traders who typically earn $250,000 to $500,000, their bosses way up the compensation ladder are still expected to notch handsome paydays in the millions.

In other words, the true fat cat bankers don't need to be scared about zeros. The ones getting zeros will include those working as low-level bankers, in the back office, or in other groups like IT and HR. They're the ones who make relatively little money. Their compensation has been pushed into their salary, and banks likely increased their salary in a conservative fashion, assuming the year's revenue meets the low end of its expectations.

Now imagine that the bank's profit exceeds those low estimates, then the bonus pool is even larger than they expected. Yet there are fewer employees to pay out bonuses to, since the lower level staff get zeros. That means those making more money will get even bigger bonuses. In other words, the relatively rich get richer, while those with relatively modest pay get less.

Let's review. Bankers aren't making less; their compensation is just guaranteed instead of dependent on performance. In fact, those getting zeros are the low-level employees who probably have little to no impact on the risk the banks take. Finally, the bankers who make the big seven- and eight-figure may get even bigger bonuses because of those zeros. Still feel like celebrating?