Pssst Wall Street: Change the Name from Bonuses to "Making Work Pay" Credits

Thom Lambert —  2 February 2009

President Obama, widely admired for his willingness and ability to engage in nuanced analysis, painted with pretty broad strokes when he attacked the bonuses recently paid by Wall Street banks:

One point I want to make is that all of us are going to have responsibilities to get this economy moving again. And when I saw an article today indicating that Wall Street bankers had given themselves $20 billion worth of bonuses — the same amount of bonuses as they gave themselves in 2004 — at a time when most of these institutions were teetering on collapse and they are asking for taxpayers to help sustain them, and when taxpayers find themselves in the difficult position that if they don’t provide help that the entire system could come down on top of our heads — that is the height of irresponsibility. It is shameful.

Obama’s message has resonated with millions of Americans and no doubt scored him lots of “forthrightness” points. Indeed, two of my colleagues, both of whom I respect greatly, told me how refreshing it was to hear their leader speak in such black and white terms, calling this sort of behavior “shameful.”

With all due respect, I’m afraid I must dissent.

Putting aside that it’s generally unfair (un-nuanced?) to lump groups of disparate individuals together to make a political point, it’s important to note:

* that many of the institutions in this bonus pool didn’t receive TARP money;

* that a number of the banks (the biggies in particular) didn’t “ask[] for taxpayers to help sustain them,” as this article explains (and note Secretary Geithner’s presence at the meeting described);

* that the bonuses were generally for the rank and file salespeople, not for senior executives, and were based on their individual performances;

* that the bonus pool was down 44% from last year; and

* that “Wall Street” (a group of disparate stock brokers, commodities traders, investment bankers, and administrative professionals who don’t work in concert) really had no more to do with this crisis than did the real estate agents who sold (and earned commissions on) homes they knew to be overvalued and who are now benefiting from Treasury’s purchase of mortgage-related assets.

Most importantly, though, it’s important to recognize that these “shameful” bonuses are effectively the wages of the working folks who did a good job this past year. Imagine you’re a salesperson at a company. In order to create an incentive for you to bust your tail, the company negotiates with you a leveraged compensation plan under which you receive a relatively small base salary plus fairly generous commissions on the sales you close. Suppose you do a bang up job one year, but the company as a whole suffers a loss because of some poor decisions beyond your control (or because of developments in the macroeconomy, such as the bursting of an asset bubble facilitated by government-sponsored entities). Now imagine that the government perceives your company to be strategically important and therefore decides to subsidize it by, say, buying its preferred stock or extending it a loan. Would it be “the height of irresponsibility” for your employer to honor your legitimate compensation expectations and pay you the wages that you effectively earned under your implicit deal with the firm? And what would happen if your employer didn’t pay you what you legitimately expected? Wouldn’t you and the other successful salespeople at your company immediately bolt, leaving the company with a much less effective sales force?

Look, I agree that private firms that get in bed with the government open themselves up to all sorts of meddling in their affairs and that it’s appropriate for the government to exercise some measure of control over the firms it subsidizes. But our leaders need to be fair in recognizing that the bonuses in this industry are really legitimate wages; that the rank-and-file workers to whom they’re being paid are not responsible for the mess we’re in; that the bonus recipients are the ones who did a good job last year and who deserve to have their legitimate wage expectations honored; and that we U.S. citizens — as preferred stockholders in these financial institutions — have an interest in retaining the firms’ best workers and in maintaining the sort of leveraged, “eat what you kill” compensation scheme that has proven to best incentivize performance.

In the end, these so-called shameful bonuses are really just a matter of “making work pay” in these struggling financial firms. Who could rail against that?

Thom Lambert


I am a law professor at the University of Missouri Law School. I teach antitrust law, business organizations, and contracts. My scholarship focuses on regulatory theory, with a particular emphasis on antitrust.

4 responses to Pssst Wall Street: Change the Name from Bonuses to "Making Work Pay" Credits


    Do you need a loan from a God fearing loan agency for your business xmas and person need contact this email that is were i got my loan contact them now hurry now for your loan today and note that they are real legit and God fearing aways remenber that a trial must surely convince you…..


    This seems somewhat contradictory to me: The banks who are in the most need get executive pay capped. Capped executive pay rates restricts the pool from which executives are drawn. The neediest banks, therefore, get those executives who are willing to work below the market rate for their expertise. Doesn’t this limit the neediest banks from the best talent when it is needed most? I guess that’s the price of socialism.


    Very nice post. I’ve been troubled by this for a few years. Someone accrues bonuses for 20 years and is then criticized for cashing them in at retirement.


    Thom: great post. I completely agree and have been making these points to the very few people who will listen. Actually, though, I think you can go further: Even if the bonus recipients had a significant hand in causing the problem–that is, even if the behavior that merited bonuses was overly-risky and likely only to offer short-term gain–even, in fact, if the behavior were downright deleterious to the economy (but presumably not, in expected value anyway, the company)–even then the bonuses should be paid because contracts should be honored. It is a simple (although I am certain in many cases, knowing) confusion of ex ante and ex post. Ex ante these contracts were negotiated as Thom describes. If ex post the world crumbles but the contract still specifies a big payout, then the payout is merited, however absurd it looks to be rewarding performance in failing firms. And yet, considered from the ex ante point of view this is perfectly appropriate. Often these contracts are precisely engineered to hedge risk so that a firm can induce employment and performance in the face if uncertain long-term prospects. I guess this kind of analysis is “nuanced,” but it doesn’t seem very difficult to me.