I come not to bury bonuses, but to praise them.
Last week, the New York State comptroller's office released its annual report. It is chock-full of great tables and charts, but the take-aways include these points:
The bonus pool for securities industry employees in New York City grew by 3 percent to $28.5 billion in 2014.CartoonDavies' latest cartoon: HUD or huh?CommentSubmit your letterReader essaysGet published in Newsday
The average bonus rose by 2 percent to $172,860 in 2014.
The securities industry added 2,300 jobs in New York City in 2014, after years of downsizing.
The cost of legal settlements related to the 2008 financial crisis continues to be a drag on Wall Street profits.
Two factors have made Wall Street bonuses a contentious issue: the size of the payouts, and that they were awarded in so many companies that had been bailed out.
I have criticized both Wall Street and the bailout of banks during the crisis. But it's important to distinguish how Wall Street's rank-and-file employees are compensated from what senior management "got away with." Most professionals understand this difference intuitively, but much of the public and many elected representatives do not. They view enormous bonuses as a sign of excess or corruption.
As a denizen of "the Street" for a few decades, I've received bonuses big and small. The bonus structure serves three purposes: It's a recruitment and retention tool, a form of risk management and a form of compensation.
The first is obvious: If you want to hire talented bankers, traders, analysts and the like, you have to compete with other firms seeking the same talent. That's how a competitive market works. It's why the Cleveland Cavaliers pay LeBron James more than $20 million a year. If they didn't, someone else would.
I know people in sales whose bonuses equal 300, 500, even 1,000 percent of their base salaries. Their base pay is low, so they have a high incentive to bring in more business.
Imagine if James were paid only $250,000 a year in salary, but received added monthly compensation for every rebound, point, assist and block. Next, he would get a quarterly bonus based on games the Cavs win. And, he would garner more bonuses based on how profitable the Cavs are from ticket sales, merchandise, TV and other revenue. A sweetener is added for playoff victories and the NBA Finals.
That's not too different from Wall Street's bonus structure, except no one there gets paid for dunks. Some firms have used the structure to discourage skilled employees from leaving. They defer compensation, including holding commissions for two or even three years. Stock options vest over time, so that employees who bolt lose the unvested portion. Holiday bonuses seem to get pushed further back each year, with many firms paying them long after Christmas.
The risk management aspect is fairly obvious. Trading losses are an omnipresent possibility, litigation is not unheard of and lots of other actions might produce losses. Withholding a substantial chunk of what would otherwise be monthly compensation gives an employee the incentive to keep on the straight and narrow and gives banks a cash cushion in case things go south.
In reality, what most professions treat as a discretionary annual bonus is, on Wall Street, merely deferred compensation. That's how employees who are compensated based on commissions, trading gains or executed deals actually receive their pay.
Now compare this compensation system with the ill-gotten gains by top executives who helped drive firms into crisis. Many of those folks walked away with tens of millions of dollars.
Critics of Wall Street bonuses should understand the difference between the system that rewards rank-and-file employees and the one that rewards senior management. They are worlds apart.