Brett King

Bank Bonus – Expect Smoke and Mirrors games

In Groundswell, Retail Banking, Social Networking on January 12, 2010 at 10:56

With such a huge public backlash against Wall Street firms and Big banks as they unabashedly prepare for a big bonus season (At least $47Bn at last estimate), it is no wonder that these guys are having to think of some PR strategies that might soother the ire of the general public, shareholders and the politicians.

Some of the public anger stems from the idea that big bonuses are being given out after banks were bailed out with money from the government’s Troubled Asset Relief Program (TARP) and other similar programs around the world. Even though firms aren’t use bailout funds to make bonuses, these banks benefited from borrowing funds from the government at almost 0% interest and then investing those funds to make a solid return – rather than lending it out to consumers as was intended.

There are two core strategies you will see the Banks deploying in the coming weeks to stave off criticism about the huge bonuses payouts:

Hey, we’re giving lots of money to charity…
JP Morgan has done extremely well throughout the crisis, so Jamie Dimon and the team there are preparing for a very healthy bonus pool. Dimon was very strong in his criticism of the UK windfall tax on bank bonuses and even threatening Chancellor Alistair Darling that if JP Morgan wasn’t exempted they might drop the plans for their £1.5Bn European Headquarters in London. Well JP wasn’t exempted and thus far there is no news over whether the threat to pull out will eventuate. Well JP Morgan has already started to send out messages to compete with the bashing they are getting over bonus payouts.

The three most recent corporate announcements from the bank include the following: JP Morgan Chase donates $2.25 million for security cameras at Chicago schools — 18 December; JPMorgan and Facebook to make $25,000 donations to 100 small and local charities— 17 December; JPMorgan gives $5 million to Feeding America, the nation’s largest hunger-relief organization — 14 December

Taking a leaf out of JP Morgan’s books Goldman Sachs is also considering expanding a program that would require executives and top managers to give a certain percentage of their earnings to charity.

Charity begins at home – how about we see shareholders getting some dividends and customers getting some fee relief I say!

It’s not really a bonus if it’s stock…
Banks justify their payment methods with large bonus schemes because so many of their top performers have their pay directly linked to portfolio or bank EPS (Earnings per share) performance type KPIs (Key Performance Indicators). They argue that top bankers will leave to go to the competition if they don’t provide the big bonus packets. Bankers at the top of the pay grade get most of their remuneration this way and thus have become dependent on it for their big ticket annual expenses like kids schooling, housing, etc

But in 2010 some of these guys won’t be getting hard cold cash. Banks are expected to pay more of their bonuses out in stock to executives this year rather than cash. Getting paid in cash circumvents ‘tax’ issues related to bonuses, and means that banks can list the cash component of the bonus as a separate item – reducing the ‘cash payout’ figure on the balance sheet and more importantly in the public domain.

Come on guys – we’re not stupid. We may not be able to understand credit default swaps or barbwire swap hedging contracts, but we do understand when you elect to simply change the payment method for executive bonuses!

The loan voices of restraint
Still, there are a select few on Wall Street and in the UK High Streets, including Morgan Stanley CEO John Mack, who won’t be taking any bonus this year. In fact, the Wall Street Journal says this is the third consecutive year that Mack hasn’t taken a bonus. Bravo!

Hey – I’ve got an idea…why don’t the banks who are considering massive bonuses restructure their remuneration systems and restrict the massive annual bonuses, instead of attempting the smoke and mirrors trick with already angry consumers, shareholders, MPs and Congress representatives…

  1. I usually don’t post on Blogs but ya forced me to, great info.. excellent! … I’ll add a backlink and bookmark your site.

    Robert Shumake

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