The Bonus Problem

Many Americans are enraged that the same Wall Street firms that received infusions of taxpayer dollars continue to dole out huge bonuses. In January, President Obama remarked that the large amount of bonus dollars handed out this year is the "height of irresponsibility. It is shameful." Strong words. But we have not seen much strong action.

Perhaps this is because the administration largely accepts what Wall Street says about its compensation practices:

1) Some bonuses are contractually required.
2) Employees will underperform and even quit if not properly incentivized.

These arguments are valid, but they do not imply that the Obama administration should forgo a much tougher stance on Wall Street bonuses. The first point probably has the most validity. It is difficult to get out of a contract without filing for bankruptcy. It should be noted, however, that the government was not too shy about forcing the auto companies to renegotiate compensation contracts with their employees as a condition for aid.

The second point, however, seems to be the hardest to swallow. There are many steps the government could make that would better protect taxpayers without obliterating the incentive structure on Wall Street. An easy first step would be the establishment of a tougher vesting schedule for bonuses. Rather than just handing over so much money to wealthy finance guys, the bonus money should be locked in an account. Bonus recipients should not be able to withdraw from that account until they have stayed at their firms for at least one year. What is the point of paying people handfuls of cash if they are just going to quit a few days later? If bonuses are really required to keep people working, the administration should require bailout recipients to structure bonuses so that people are incentivized to actually stay at their firms. Another option would be to lock up at least a portion of those accounts until the government is repaid.

Thus far, it seems that the Obama administration has really just paid lip service to this issue. We have heard some tough words from the president. And a few rules have been implemented regarding compensation for the top five executives at some firms that receive government money. But we could be doing much more to protect taxpayer interests without causing irreparable harm to Wall Street's incentive structure.