TOPICS > Economy

Backlash Continues Over Billions Paid in Wall Street Bonuses in 2008

January 30, 2009 at 6:10 PM EDT
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In one of the worst economic years in history, Wall Street executives received more than $18 billion in bonuses. Experts examine how such bonuses work, followed by the analysis of Mark Shields and David Brooks.

JEFFREY BROWN: A disastrous time for Wall Street and the U.S. economy, yes, but not for bonuses and executive compensation. Wednesday, New York’s controller reported that employees at the state’s financial companies received $18.4 billion in bonuses last year, the sixth-largest amount ever in a year that will go down among the worst ever.

Today, Democratic Sen. Claire McCaskill of Missouri said she’ll introduce legislation to cap compensation. It would bar executives from making more than the president of the United States, $400,000, while their companies receive government aid.

Later, White House spokesman Robert Gibbs said it was, quote, “very safe to assume the administration will take on the pay issue soon.”

The strongest words of all came yesterday from Gibbs’ boss, President Obama.

BARACK OBAMA, President of the United States: That is the height of irresponsibility. It is shameful. And part of what we’re going to need is for the folks on Wall Street who are asking for help to show some restraint and show some discipline and show some sense of responsibility.

JEFFREY BROWN: And for more on the pay issue, we turn to Nell Minow, co-founder of the Corporate Library, a watchdog group, and Michael Melbinger, a partner at the law firm Winston & Strawn in Chicago, who specializes in executive compensation.

Well, Nell Minow, strong words from the president. Are they warranted?

NELL MINOW, The Corporate Library: I’d be a little stronger. I think it’s more than irresponsible. I think it’s stupid.

You know, if Wall Street has a brand, they are deteriorating their brand because they are so completely out of touch. They’re showing themselves to have no sense of responsibility. And there’s no reason on Earth why the United States will continue to be the financial center if we can’t do better than that.

JEFFREY BROWN: All right, well, let me get a quick word then on Michael Melbinger. What do you think?

MICHAEL MELBINGER, Attorney: Well, I think the anger in this case is misplaced. I think some bonuses need to be reduced; some bonuses should be cut entirely.

But I think this group of bonuses was not for the highest of the high-paid, but more for the producer level in the folks who are in compliance and keep the trains running on time.

And I think those people, the way Wall Street compensation works, their compensation is all paid at the end of the year in bonus. It’s more like a sales commission than a bonus. So I think we need to really look at them one at a time.

How Wall Street bonuses work

Nell Minow
The Corporate Library
The one thing that we count on Wall Street to do is to manage risk. They did that very, very badly. There have to be some consequences.

JEFFREY BROWN: All right, well, let's try to help us understand, both of you, how Wall Street compensation works. Starting with you, Nell Minow, you know, a lot of people think about pay as related to performance. Is that the way to think about it here?

NELL MINOW: Of course it is. It's a good thing that so much of their pay is tied up in the end-of-year bonus. It's sort of like being a waiter or doing sales. You want them to be very, very focused on performance.

But they benefited tremendously on the upside by the performance of the overall group in their company, and they got to take the hit on the downside, too. There's no credibility whatsoever in the program unless it goes down as well as up.

JEFFREY BROWN: Well, what's the response to that, Mr. Melbinger? Because that's what has people scratching their heads or worse in a case like this, in a bad year. What about -- what happens on the downside?

MICHAEL MELBINGER: Well, again, most of these -- many of these folks, there are sort of three categories of people here, but there are two categories of people who I believe the bulk of these bonuses were paid to, and I'm not familiar with any individual circumstances, so there may be some that are not in line.

But you have the producer group who are responsible for bringing in new money, new business, new deals. And they're typically paid, again, like a commission. If you bring $100 million in for management of our firm, you get 0.1 percent of that amount. Those are the people shareholders need to retain. You need those producers to make money for the banks.

The other folks are the risk management and comptrollers and compliance and internal audit, those folks who, again, as I said, keep the trains running on time, who need to be paid, and they're paid as a bonus, too, even though it was a bad year.

NELL MINOW: But the trains weren't running on time. You know, why are we paying people for this catastrophic behavior? The one thing that we count on Wall Street to do is to manage risk. They did that very, very badly. There have to be some consequences.

I understand the importance of retaining people, but what you do is you defer that compensation until the bailout has been completed.

JEFFREY BROWN: Mr. Melbinger?

MICHAEL MELBINGER: I think, again, I want to distinguish between some of the highest-paid executives. I think that's where the real hit should be -- should be taken and maybe the next tier down. But I think more of the folks in the middle tiers probably deserve a lot of the compensation they received.

JEFFREY BROWN: To look forward here, one of the discussions, Nell Minow, involves the TARP money, the money, the bailout fund, and the idea that the government might have more power, even responsibility to deal with limiting compensation when it's putting money into firms.

Is that how -- now, how might something like that work? We hear the secretary of the treasury talking about it.

NELL MINOW: I understand the feeling that -- the frustration in the government and particularly in Congress, but I don't think that the government should ever be in the business of setting anybody's salaries, either as a percentage or in any other way.

But while they are participating in the bailout program, I think there are some things that they should do, and there are also some more widespread reforms. I think, particularly we want to have clawbacks universally adopted.

JEFFREY BROWN: Explain what that means.

NELL MINOW: That means that, when you get a bonus based on particular numbers, and then a year later it turns out that those numbers were either fraudulent or mistaken, you have to give some of that money back. If we'd had that system in place, we wouldn't have a lot of these anomalies now.

JEFFREY BROWN: Mr. Melbinger, what about that clawback idea? Because that's something I hear various people talking about. Senator Dodd talked about it even in the current situation.

MICHAEL MELBINGER: I agree. First of all, the TARP legislation does have significant restrictions on executive compensation. And that's fine, because offering TARP funds -- nobody had to take TARP funds. If they took TARP CPP funds, that was a knowing decision by them and they understood what the restrictions are and apparently were OK with them.

But I'm in favor of the clawback, especially if you agree to it. And clawbacks have been slowly spreading throughout the market. Enforcing one to or requiring one in order to get TARP funds, fine with me.

JEFFREY BROWN: What about looking back at the last year's bonuses and compensation? Is it possible to get any of that back now?

MICHAEL MELBINGER: That is problematic from a legal perspective, because -- for a couple of reasons. There's state wage payment laws that probably prevent from you getting bonuses back. There's contractual rights that these folks had in their bonuses. Unless there was some really fraudulent behavior, then it's going to be tough to get the bonuses back from those folks.

Other possible reforms

Michael Melbinger
Winston and Strawn
Just like we had an election for president, shareholders have a right to vote the directors out.

JEFFREY BROWN: Nell Minow, you talked about other possible reforms. What kind of things do you have in mind?

NELL MINOW: The most important thing for me is to give shareholders the opportunity to replace the boards of directors who agree to these pay plans. That's the only thing that's ever going to make a difference. Now...

JEFFREY BROWN: But why, exactly? Because the directors are the ones who...

NELL MINOW: It's the directors who are the ones who are responsible. However, I want to point out, also, that President Obama, when he was in the Senate, was a sponsor of some legislation that would give shareholders an advisory vote on pay packages. That's been very successful in some other countries, including the U.K., and I would suspect that as president he will try to promote that again.

JEFFREY BROWN: Do you see, Mr. Melbinger, any move afoot to, for example, the kind of reform she just referred to with corporate boards?

MICHAEL MELBINGER: Yes, I think "say on pay" is really taking hold. I think it's -- so far it's been totally voluntary, mostly voluntary, and a lot of companies are adopting it anyway. I think it's a good idea.

JEFFREY BROWN: And how would that work?

MICHAEL MELBINGER: Well, I guess, there's a slight difference in maybe the two things we're talking about. "Say on pay" gives shareholders a right to really more of an advisory opinion. "We think that you're paying too much," whereas I think what Nell was suggesting is the shareholders would vote the directors off, Nell, I think?


JEFFREY BROWN: Yes. It's that direct, so what do you think about that?

MICHAEL MELBINGER: Well, you know, that's what the shareholders have a right to do. That's why they have a vote. Just like we had an election for president, shareholders have a right to vote the directors out. And it should be -- they should know their feet are to the fire and people are looking at what they're doing. I agree with that.

JEFFREY BROWN: Nell Minow, you know, this is hardly a new issue. I know you've been looking at it for a long time. We've had many discussions here. It seems like it comes up every few years when there's a financial disaster of some kind.

NELL MINOW: That's right.

JEFFREY BROWN: This is a real big financial disaster. Do you feel it sticking in some new way?

NELL MINOW: I do. I think because, in the past, it has been very localized, this time it appears to be systemic. I've really never seen the level of rage and sense of unfairness in response to the bonuses that I've seen this year.

And I think having President Obama, who is very familiar with the issue, is very committed to the issue, in the White House, I think it's a target-rich environment for reform.

JEFFREY BROWN: All right. We'll leave it there. Nell Minow and Michael Melbinger, thank you both very much.

Congressional action

Mark Shields
Syndicated Columnist
And once you accept public money, how the same Congress that could impose wage restrictions on autoworkers in Detroit and let these guys write themselves billions of dollars in public money is just indefensible.

JIM LEHRER: Now back to Mark and David on this.

Mark, do you think the president took a fair shot at Wall Street?

MARK SHIELDS, Syndicated Columnist: Took a fair shot, Jim, but I think the test right now is on the Democrats. The Democrats had a majority of the Senate last year, when, for example, it was revealed that hedge fund CEOs were making -- being paid -- paying taxes at a rate of 15 percent a year, and while the women who were cleaning their private restrooms were paying twice that much in taxes.

And it was just -- there was a hue and a cry. And the Democrats did nothing in the Senate on this.

JIM LEHRER: Nothing happened?

MARK SHIELDS: I mean, this is -- Nell Minow is absolutely right. I mean, the outrage on this is genuine and it's authentic.

JIM LEHRER: Do you agree it's going to -- something should be done about it, David?

DAVID BROOKS, Columnist, New York Times: Yes, not what Claire McCaskill is saying.

I mean, I thought what Obama did was the right thing. First of all, you need social pressure. Capitalism is a great system, but you can't have amoral capitalism. Capitalist institutions have to be surrounded by social understandings, by a set of norms that we all adhere to or that are enforced by shame.

And the president was absolutely right to impose a little shame on people who, A, didn't understand the situation has changed, the environment has changed now that the public is helping support their institutions, and, B, who are just awarding themselves bonuses at the expense of their shareholders that are way out of line with what I think most people believe is necessary to keep talent at firms.

MARK SHIELDS: I go far beyond David. I mean...

JIM LEHRER: You think it should be a law?

MARK SHIELDS: I do. I think Claire McCaskill is right. I think that...

JIM LEHRER: To repeat her proposal is that...

MARK SHIELDS: Nobody -- nobody...

JIM LEHRER: ... gets more money than the president.

MARK SHIELDS: Nobody would get more money than the president. Mine is a simple different test. That is, nobody should make 20 times more than a Marine squad leader in Iraq or Afghanistan, which is $21,000 a year, which gives them a little bit more.

Jim, they have bonuses for a simple reason: That's to reward performance and to retain talent, OK? The performance does not merit a reward, first.

Second, there isn't a pool of talent out there now. There's an ocean of talent available, I mean, given their layoffs in this industry.

And once you accept public money, how the same Congress that could impose wage restrictions on autoworkers in Detroit and let these guys write themselves billions of dollars in public money is just indefensible. They have to act.

Paying for talent

David Brooks
The New York Times
[T]he reality is, to keep top talent from going overseas or wherever it would go, you've got to allow pay over $400,000 a year in New York City.

JIM LEHRER: Is that a moral -- that's a moral issue?

DAVID BROOKS: Well, I do think it's a moral issue. I still think the McCaskill idea is just a terrible idea.


DAVID BROOKS: Because these are banks that depend on superstars. And there's not an ocean of superstars out there. And we may not like these people, but the fact is, to get a good CEO who can lead a company effectively, there are actually, if they can do it well, if they're Jack Welch or somebody, they're actually worth the money.

Now, that doesn't mean I'd buy into the hedge fund bonus structure, which was yielding $300 million bonuses. But, nevertheless, the reality is, to keep top talent from going overseas or wherever it would go, you've got to allow pay over $400,000 a year in New York City.

MARK SHIELDS: These are companies -- let's be very candid -- they are now taxpayer-subsidized. If they have these superstars, they probably haven't reached that point.

JIM LEHRER: But there also is, as the man from Chicago pointed out, there are some of these things that are called bonuses that are actually in the mid -- they're not the CEOs. Do you agree?

DAVID BROOKS: Well, they're going to stop calling those bonuses tomorrow. They'll just be regular salary, and we won't even know. We won't pay attention. That's one of the ways they'll get around all this.

JIM LEHRER: Do you agree that's possible?

MARK SHIELDS: He knows more about it than I do, but I do think, if you're going to take public money, you have to abide by a public pay scale.