It's bonus season on Wall Street and the paper's are going nuts with the news that even though the economy is in the crapper, bankers are receiving "obscene" bonuses (their quotes). I'm here to tell you all to calm down while I explain why banker's bonuses are so large and why they will, and should, stay that way.
These "bonuses" (my quotes) that you hear about in relation to Wall Street are not the same as the bonuses that you and I might receive in our regular jobs. If you work in a hardware store and do an exceptional job all year, your boss might give you a few hundred dollars as a reward for working so hard. Or you might get treated to a nice dinner. Or you might get some form of profit sharing from the company as an incentive to work hard.
Wall Street bonuses are not the same as these type of bonuses. Instead, Wall Street bonuses are VARIABLE DELAYED INCENTIVE COMPENSATION. Let's break that down:
VARIABLE - Varying. Different. Not always the same.
DELAYED - Not right now. Later.
INCENTIVE - A stimulus to promote a certain type of behavior.
COMPENSATION - The important part. What you get paid to do work.
On the surface, this sounds like a Main Street bonus, but the word 'Compensation' is the give-away. The Wall Street bonus is PART OF THE NORMAL PAY. I repeat, PART OF THE NORMAL PAY.
You and I get paid a certain amount of money and that will remain the same throughout the whole year no matter how well we perform. If we do extra well, our bosses may deign to gift us a bonus. Wall Street bankers get paid a fraction of what they're worth throughout the year and are paid the majority of their income (the 'obscene bonus') at the end of the year as part of their normal pay. So, for instance, a Managing Director who is the head of a trading desk might make $400,000/year as their base salary while receiving $5 million as a 'bonus' at the end of the year. That end of year lump sum will go up or down depending on how their trading desk performed, but the total compensation will usually fall somewhere in the range of normal compensation for the banking industry. Lest you think $5.5 million is a lot, a trading desk doing good business can easily make $50 million in profit for the bank. If you are the head of the trading desk and your efforts generate $50 million in profit, would you stay at the bank that paid you $2 million? Heck no! You'd find out what the market could bear for your services and go to the bank that paid you that amount! And a business would be foolish not to pay for someone who could make that much.
If Wall Street bonuses are regulated and/or capped, the only effect will be that the base salary of these bankers will jump greatly to match the market rate for these profit centers. And 'profit centers' are what they are. As soon as they stop making money on a regular basis, they get fired. No two ways about it. I remember when I was working at JPMorgan that a trader got canned after losing a lot of money in a bad quarter and his boss told him, "the company would have been better off if you had just stayed home the last three months". There's a limited number of seats on the trading floor and if you can't make money, and a lot of it, they'll find someone who can.
Keep in mind, that these large bonus numbers only apply to the elite traders and desks who have been proven money makers. Desks which lose money usually have their personnel fired and/or their bonuses cut drastically. And the middle tier of traders and the bottom tier of everyone else (technology workers, research analysts, custodial staff, etc...), get paid MUCH less than the top traders. Which is why the top trading positions are so coveted, of course.
So don't be too upset that some Wall Street workers are being paid this much money. They earned it. Wall Street as a whole, on the other hand, that's a different story.