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Wall Street's record-breaking paystubs: Pay for performance? Really?

Yesterday's post, which questioned the dubious news that banks were--surprise!--finally realizing that paying top dollar to poach stars doesn't always work out well, preceded today's even more dubious headlines. The collective executives of Wall Street are on track to pay their employees $144 billion, shattering the record payout for the second year in a row. Their defense? What else? "If they don't adequately compensate employees," banks told the Wall Street Journal, "they risk losing top talent."

That implies, of course, that individual performance, skill and talent is what generates the increasing revenues for these companies. This, after all, is the bedrock upon which all performance plans today are based, both inside and outside the confines of Wall Street's canyons. "Pay for performance"--the mantra of CEOs, directors, HR executives and pay consultants the world over--starts with the assumption that employees have control over how well they perform, and that individual performance is a result of innate talent and irreplaceable skills.

But what if they're really just more lucky than good?

Yesterday's post already examined how much resources, culture and colleagues shape the performance of any supposed star. But luck surely plays a role, too, especially in the often high-stakes game of high finance. As commenter ThomasW1 wrote in response to my post yesterday, "They may have become stars simply by being in the right place at the right time; they were initially just lucky. With many, many smart people all working with the same information, the best decision will never be obvious no matter how smart you are."

I'm not suggesting companies shouldn't reward good performers. Clearly, some people take their jobs more seriously than others, work their networks more effectively than others, have natural talents that exceed their peers', and are more diligent, comprehensive and hard-working than their colleagues. A meritocracy is the backbone of any successful institution; performance--both individual and organizational--is doomed without one.

But meritocracies have their limits, too, and the notion of "pay for performance" can be taken way too far. People do not have complete control over their performance--it is shaped by the quality of their managers, the economic environment they're working in, and the cooperation of their peers. Too much focus on paying for performance--and the inherent bonus culture that goes with it--can result in overly competitive, decidedly risky and dangerously hubristic behavior.

And yes, ThomasW1, luck is a big factor. Traders or sales guys or engineers who get matched with helpful managers or are fortunate enough to be placed on the right account at the right time are more likely to look like star performers than those who end up working on a market that soured or with a customer whose prospects dimmed through no fault of their own.

At some point soon, if it hasn't already, the discussion over Wall Street pay is going to become a theater of the absurd. Despite countless efforts to curb the excesses, despite bankers' central role in creating the financial crisis that still holds our national economy in a headlock, and despite the public sentiment against the unpopular bailouts, the plot to change the structure of the financial industry's compensation seems as illogical as ever.

Someday, hopefully, the financial industry will recognize that while a meritocracy matters, too much focus on rewarding supposed talent will keep creating as many risks as it does rewards. Until then, as the old adage says, it'll likely keep being better to be lucky than good.

By Jena McGregor

 |  October 12, 2010; 10:42 AM ET |  Category:  Bad leadership , Corporate leadership , Economic crisis Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati  
Previous: Paying top dollar to snag a star performer? Big mistake | Next: Luis Urzua: Chile's underground leader


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The answer is simple- make these excellent people responsible for fixing the economy. First, pay them off with the face value of toxic assests. That takes the bonus money off the books, and no longer a drag on the bank's bottom line.

If the hot shots are that good, they will work hard and creatively to make the toxic assests good. If they are only mediocre workers, then they are stuck with the toxic assests they first made bad.

Posted by: LeeH1 | October 13, 2010 11:06 AM

No body learned nothing from the recent financial collapse, including all the Tea Party supporters!! People are unemployed left and right and yet the stock market is hitting highs again and again! Do you see a weird picture there? More proof that the "the rich gets richer and the poor gets poorer" manifestation is as strong as ever.

I don't want to even imagine the day when the Republicans regain control of Congress, and God forbid, the WH. Are many voters really so blind to the fact that they want to vote into office people who give everything to the rich (and crooks), a class which does not include more than 90% of these voters?

Posted by: KT11 | October 13, 2010 11:00 AM

This morning Stiglitz was on CNBS claiming that we needed to "return to Keynes." While there isn't much that Dick Armey and I agree with, he hit Stiglitz over the head with the truth on this one: Keynes' theories required that you run surpluses during boom times, filling the Treasury with the money you then intend to spend during downturns.

We haven't done the former, and thus can't do the latter without courting disaster. The deficit spending and money-printing are simply going to foster further speculative carry activity which will in turn reflect back into input costs via commodities. The money will not go to work here - when you have a ZIRP environment and your currency is depreciating there is no yield to be had here (you've declared that in-nation assets are worthless) and in fact all you have to do is convert the funds to some other currency and sit to earn a return - you don't even have to invest, as the currency depreciation makes money for you!

This is idiotic and yet the fact that money is fungible means you can't prevent this from happening - except by not doing it.

We cannot exit this economic malaise so long as we continue to prop up failed institutions and watch them bonus out tens of billions of dollars to their employees for screwing America blind coming and going. All we do with these policies is direct the money into commodity speculation and overseas yield-earning instruments which further depreciates our currency.

Bernanke and the markets think "QE2" will save us. It will not. All it will do is produce another depression inside the one we're already having and the government is unable to add another $1.5 trillion annually in deficit spending on top of the spending it's already doing. The lower and middle classes will feel the inexorable weight of the commodity price ramp starting about now, and continuing into the holiday season and the New Year, which will do exactly what it did the last time.

This is a proved failed policy, but there's nobody with a brain home in Congress, the White House or in The Fed who will pull their head out of the ass long enough to realize that fellating bankers will not resolve what ails us, when they're the ones who have been robbing the citizens with fraudulent schemes for the last 20 years and are now desperate to avoid the just desserts that should attach to their behavior.

Posted by: misssymoto | October 13, 2010 10:07 AM

Until stocks have risen way above what they were when the crash occurred, there is not record profits nor should there be bonuses!!! Math is simple not difficult. If I had 100 dollars and I lost 90 dollars, until I have 101 dollars back into my account, I have NO profit!!!! Give back the American worker good wages and don't allow the people on Wall Street to steal the money that we produce. Regulations will not help. . .prosecution will with laws that are written to control greed. I never belonged to a union, but now I believe they are necessary to give the American worker just wages.

Posted by: cousinpolly1948 | October 13, 2010 9:39 AM

Heads, they win. Tails, they win. Dump the stock market as an investment vehicle. What are you investing in, really? What good is it doing?

Posted by: SarahBB | October 13, 2010 9:29 AM

As long as there are no consequences for the "Wall Streeters and Bankers" who are robbing the American People and our country, why should they worry?



Posted by: barrysal | October 13, 2010 7:52 AM

Quit whining about how the winners reap and go get a service job. Be sure to re-elect those great politicians who can't deliver on your social concerns either.

After all, losers deserve loser representation and that is what we have.

Posted by: Over-n-Out | October 13, 2010 6:18 AM

Sec Treasury Tommy Turbo Tax and his allies at the Fed try to have all of us believe this B.S. about their lack of control over the "Free Market" and the rewards these crooks give themselves, courtesy of the U.S. Taxpayer. Bail Outs, .25 Free Fed Money, a license to steal, all the while destroying the U.S. Economy, in the name of the "Free Market".
The bigger joke of all, all those Tea Bagger Fools proclaiming; Obama is a "Socialist", no make that a " Secret Republican", the enabler of this Wall Street Crime Wave.

Posted by: jeromejmarkiewicz | October 13, 2010 5:04 AM

How is it that Wall Street posts record bonuses for people who are along for the ride of a government-sponsored bailout of their screwups? It should be clear that the reward system neither directly rewards performance nor ensures the health of the financial markets. It is effectively legal thievery.

If ever something appeared ripe for regulation this is it. Is it our fear that regulating this behavior will drive financiers overseas, to more friendly venues like the Cayman Islands or Lichtenstein?

Posted by: Tenmile1 | October 13, 2010 4:20 AM

The REAL issue here isn't pay for performance, it's pay when the company loses it's shirt. Take one wall streets company giving out BILLIONS in "Bonuses" after it LOST 6 BILLION Clearly there is a disconnect.

A normal person in a job does NOT get a "bonus" if the company loses money and FAILS.

This "contract" bonus really isn't a bonus it's just plain PAY. When a company goes bankrupt and the CEO and others get bonuses, this is CLEARLY criminal. It's worse than stealing.

Getting a bonus because the company made money on your actions or just in general is ok, but bonuses for the sake of a "bonus" is not a bonus at all.

If you want to call something pay for performance let it be directly tied to it. if the company fails you lose not only the "bonus" but your paycheck as well. ZERO people should get a bonus "retainer" to help unwind a company they destroyed.

We need FULL disclosure of pay to these top men in PUBLIC companies and let us see these BONUS terms.. which most likely reads " it so and so is breathing on this date they get a bonus" This crap about well my pay is only $800K a year crap is laughable. when you do a final check they make 10 million in "bonus" PLUS 10+ million in stock options. ALL of this should be set as BASE PAY. a BONUS should not be in a contract, a bonus is something that is given over and above NORMAL pay based on performance, 95%+ of the Bonuses paid out by these wall street types is NOT tied to anything other than breathing at a date. When a company can FAIL go bankrupt and STILL pay BILLIONS in bonuses you can't in any way shape or form call these "PERFORMANCE" bonuses.

The system is a JOKE

Posted by: ghod | October 12, 2010 9:32 PM

This is ludicrous - Wall St has no fear, which is indescribably despicable, nor shame - which is apparently the Amercan way when it comes to Profit, regardless of where profit comes from or at who's expense. Disgusting.

Posted by: USA4ALL | October 12, 2010 5:51 PM

Capitalism is broken in America. The government doesnt enforce properly and colludes with the special interests that feed it cash.

Ultimately a board in a company should be responsible for the oversight on a companies executives. The problem is most of the time these board members are made up of the companies executives. Other times, business associates from one company serve each other's boards.

So basically it's the foxes guarding the hen house. Why wouldn't you give your self obscene amount of money if you could get away with it? And they are.

The other problem... and it is heresy to say this these days ... unions. Unions used to be a check on higher level management. Since the 80s unions have been losing power gradually. They have very little influence today also because the manufacturing sector is almost gone.

Posted by: theAnswerIs42 | October 12, 2010 5:06 PM

So long as the Fed keeps short term rates at 0.2%, while Treasury bonds are at 2.5%, banks can book bets on the spreads off balance sheet and through hedge fund counterparties, making mountains of money. There is no need to lend to small businesses or bid more for depositor's funds. Low interest rates also keep more mortgages from tanking, camoflaging the state of the balance sheets.

The geniuses are the ones who've learned that the regulators are always two steps behind and must always cover trading losses to avoid "system risk." Bernanke and Geithner make sure things stay that way. The snowball of risk continues to roll on and on, towards the eventual cliff, when finally the currency will collapse. By then, though, the traders will have sold the long T-bond positions to pension funds. Obviously, it's possible to reap billions in bonuses without GDP growing or without the public realizing who will eventually pay the bill.

Posted by: jkoch2 | October 12, 2010 4:51 PM

Why don't banks just pay a higher rate of interest to their customers? Say back to 51/2% on regular passbook savings. After all, these bankers are playing with the depositor's money. The argument "to retain top talent" is horescrap. If the banks in this country don't start playing by realistic rules, the day will come when the masses won't care what's "top talent" and will extinguish them all...I can't wait for that day. in the 60's I worked for a bank. believe me, at that time banking was one of the worst business endeavors/profession to get into because of the low pay bank employees received....what's happened since that time?

Posted by: bigisle | October 12, 2010 4:26 PM

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