Wall Street bonus to go the way of the dinosaur?

 

NEW YORK: The Wall Street bonus, considered a sacred ritual, may become the industry's biggest casualty as governments worldwide bail out financial institutions.

UBS AG was told to reduce bonuses after the Swiss government gave the country's biggest bank a US$59.2 billion (US$1 = RM3.61) lifeline. Bank of America Corp is under pressure to scale back payouts after New York Attorney General Andrew Cuomo subpoenaed executives earlier this week for information on compensation and President Barack Obama said just yesterday that bonuses handed out by banks represent "the height of irresponsibility".

The current system of "asymmetric compensation", in which people are rewarded when they do well and aren't required to return the rewards when they lose money, is detrimental to society and needs to change, said Nassim Taleb, a professor at New York University and author of "The Black Swan: The Impact of the Highly Improbable", in an interview.

The worst economic crisis since the Great Depression, a US$700 billion taxpayer bailout in the US and the demise of three of the biggest securities firms - Bear Stearns Cos, Lehman Brothers Holdings Inc and Merrill Lynch & Co - didn't deter investment banks from offering year-end rewards to employees on top of their salaries.

Financial companies in New York City paid cash bonuses of US$18.4 billion last year, the sixth-most in history, even as they posted record losses, according to data compiled by the office of state Comptroller Thomas DiNapoli.

"We won't arrive at a situation where there are no bonuses," Stephen Green, chairman of HSBC Holdings Plc, said at a press conference in Davos yesterday. "There are always parts of companies that are profitable, and if somebody's been working in a profitable business in a market where bonuses are a normal part of compensation, it's difficult sometimes to say you won't have any bonuses in that business."

NYSE Euronext chief executive officer Duncan Niederauer said yesterday in Davos that "some compensation models need to be completely overhauled". He added that this would be difficult to legislate and companies will have to take the lead.

"While a number of people clearly do create wealth by brain power, by use of the company's balance sheet and by other resources, other people have been receiving incentives for basically turning up," Barclays Plc chairman Marcus Agius said at the World Economic Forum. "That I don't think is very smart. An incentive system properly designed and fairly calibrates is absolutely fundamental."

Zurich-based UBS cut its 2008 bonus pool by more than 80 per cent to less than Sfr2 billion (Sfr1 = RM3.16) after the company was forced to accept government funds in October.

Wall Street firms need to "show some restraint and show some discipline," Obama said yesterday, with Treasury Secretary Timothy Geithner and Vice President Joe Biden at his side.

Obama's attack on "shameful" bonuses may lead to new pay limits and management restrictions as the price for companies that seek out government aid. - Bloomberg