The issue of Wall Street bonuses is actually very interesting because it is more so a story of the history of Wall Street than anything else. The big investment banks, which are on track to dole out record bonuses just eighteen months after being bailed out on the taxpayers' dime, have long roots dating back to nineteenth century America. Before there were organizations like the SEC or NASDAQ, banks operated very much like law firms; banks were owned and operated by a group of partners. Goldman Sachs, Bear Stearns and Morgan Stanley were once all privately owned. This structure not only allowed the group of partners to have full control of how much money would be retained by the firm, but it also allowed the partners to decide how much to distribute in bonuses. In simplistic (but also quite truthful terms) the banks would decide what percentage of the profits to disperse to partners and what percentage to reinvest in the firm. What did these privately owned banks decide to do? For the most part, they dispersed about 50% as profits to their employees, and the other 50% was reinvested in the firm to help it expand.
Today Goldman Sachs, Bear Stearns and Morgan Stanley are all publicly traded companies. What this means is that they are no longer owned by a small group of partners, but rather, by a vast array of investors, both small and large. Who decides how much bonuses will be given to employees at these banks? Usually, an internal Committee on Compensation decides on bonuses. These Committees, however, are steeped in the old traditions of Wall Street and treat bonuses as though they are partnership disbursements when in fact the owners of these banks are shareholders. Let’s take a look at Goldman Sachs’ SEC filings. What is disturbing is not only the absolute magnitude of compensation, but also the upward trend in 2008 (the year in which Goldman received bailout money from the US Government).
We all know that the banks give out bonuses, but the real question is why do the shareholders of these companies continue to allow these banks to give out these extravagant bonuses – if the shareholders exerted control and vetoed the bonuses, the result would be higher retained earnings for the shareholders – and higher profits for the company. Something shareholders would certainly not be opposed to.
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"Some of the largest shareholders in Goldman Sachs Group Inc. have urged the Wall Street firm to reduce the size of its bonus pool, arguing that it should pass along more of its blockbusters earnings to investors, according to people familiar with the situation."
ReplyDeleteNow if only the majority of average Joe Americans held tens of millions of Goldman, JPMorgan, Morgan Stanley shares, then we might have some something brewing..