Can Bonuses Do More Harm Than Good?

The terms 'greed' and 'Wall Street' have been linked since 18th century traders and speculators met to make deals and bargains under a buttonwood growing along the street. In the 21st century, the term 'Wall Street' has expanded to include the self-indulgence of big business interests and investment banking. When these indulgences dip into the little guy's already shrinking pockets, it is time to cry "Foul!"

With recent government bailouts, that is exactly what is happening. Americans still have a strong sense of fair play. We first learned about fair play from mom when it was time to share the candy, we reinforced our sense of fairness on the Little League fields of our youth, and we demand to see it in business as adults. When Wall Street executives were being handed bonuses—big bonuses—for driving their companies into bankruptcy, the hue and cry could be heard on Main Street. This is anathema to the American conscience: Make good choices, get rewarded; take stupid risks, get rewarded big time!

"But isn't that how capitalism is supposed to work?" you may ask. "Aren't risk-takers deserving of the payoff?" Except that once again, government bailouts have siphoned money from other sources to manage a crisis that need not have happened. When those 'other sources' are you and me, we have a rightful responsibility to speak up. It is a problem that has yet to be resolved.

Jack Hough, associate editor at SmartMoney.com, writes, "for risking everything and failing spectacularly, the bosses lost plenty but gained more." He bases his conclusion on research reports from Harvard Law School and The Yale Journal on Regulation that uncovered some mind-boggling numbers. The top executives at Lehman Brothers received $1 billion in cash; those at Bear Stearns totaled $1.4 billion. Even though the executives had personal on-paper loses of millions as their stocks fell during 2007 and into the crisis of 2008, the studies found that the cash payments "substantially exceeded the value of the executives’ initial holdings in the beginning of the period.”

The period for the study stretched back to 2000. The researchers went back that far because the real question that they wanted to answer was not how much cash did the CEOs get, but whether or not the executives had some incentive to make decisions that we can now, in hindsight, label as crazy risk-taking. By looking at this broader time span, the researchers were able to compare cash rewards of the earlier decisions to become heavily involved with mortgage securities against the penalties that occurred later and then determine the overall gain or loss. The conclusion was yes, they had incentive to take wild risks.

The real tragedy is that not much has changed. For those of us who must live on Main Street, it is time to add a new refrain to the protests of "Unfair!" It is time to add, "Use your brain and don't let this happen again!"