We Still Need Bonuses for Investment Banking Jobs

The whole notion of awarding top performers a bonus is getting hammered these days, both by Washington politicians and a shift in popular sentiment.

One angry politician, Sen. Claire McCaskill, D-Missouri, has even introduced legislation to cap compensation for employees of any company that accepts federal bailout money. Under her bill, no employee would be allowed to make more money than the president of the United States, reports CNN.

However, in a recent article in the New York Times, Bob Cox suggests that the critics should be careful. The bonus has been a pillar of the capitalist system, he writes. The prospect of earning a reward for exceptional performance drives people to work harder and be more creative. It helps prevent employees from losing interest in their jobs. And if properly structured, a bonus system can align workers’ goals with larger corporate objectives.

Obviously, the problem lately has been a misuse of the bonus system – awarding outrageously high amounts to executives without tying it to the actual performance of their firms. This “bonus addiction” was exacerbated, Cox says, by the habit of paying senior bankers relatively little in base salary. They viewed bonuses as standard pay to keep them in line with their peers.

Already, Wall Street bonuses are reported to be down 44 percent on average for 2008. Banks such as Morgan Stanley are clawing back some cash bonuses. UBS is holding bonuses in escrow, to be taken back if the bank loses money. Credit Suisse, as we’ve mentioned before, is paying top executives with securities backed by the garbage assets that have been responsible for this mess.

New laws capping salaries and limiting bonuses may play well with voters. But it could also send the brightest and most ambitious investment bankers offshore in search of their next investment banking job.

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