War On Bonuses

There's news all over the world that signals that bonuses at financial services firms will be under attack. First, Goldman Sachs, in response to public pressure, has cut back cash bonuses for most of its top executives.

Goldman Sachs moved to quell public anger over executive pay on Thursday by unveiling plans to eliminate cash bonuses for its top 30 executives this year and give shareholders a vote on compensation.

The new policies come as some of the world’s financial capitals weigh steep taxes on bonuses paid to employees of banks that drew government support during the credit crisis. Goldman’s rapid recovery from the downturn, and the likely windfall many employees will reap next month thanks to surging profits, has made the bank a frequent target
for politicians and shareholders.

Meanwhile, France, Britain and Germany are all on the verge of setting so called sur tax on bonuses at financial firms.

The British special tax on banker bonuses unveiled this week received crucial backing from France, but other important countries have so far declined to follow the U.K.'s bid to curtail banker compensation.

Reaction to the U.K.'s move underscored how difficult it is to coordinate reform efforts globally. While France said it would likely enact something similar, Germany expressed support for the concept but had no immediate plans to do anything similar. On the other side of the Atlantic, the U.S. showed no signs of following suit.

Domestically, Kenneth Feinberg is now in full swing trying to determine bonus structures for the second tier of executives.

The Obama administration's pay czar plans to announce on Friday his next wave of rulings as bailout recipients struggle to get out from under his thumb.

Kenneth Feinberg has said these rulings will likely reduce pay for the 26th to 100th highest-paid employees at the six firms still under his authority.

Those firms, all of which received "exceptional assistance" from the taxpayers, are: Citigroup Inc (C.N), American International Group (AIG.N), General Motors Co (GM.UL), Chrysler, Chrysler Financial and GMAC.

Now, the problem is that financial executives are totally unsympathetic. So, no one will be all that bothered by a war on their compensation and many will cheer. Such an environment creates a mob mentality. That's the worst kind of an environment.





All of this is essentially class warfare. It has no economic benefit. It is filled with unintended consequences. Puntive taxes on bonuses in financial firms means that talent goes to other firms. It also means that talent goes to countries where the same punitive measurements aren't in place. We tried something similar in the 1990's. That lead to bonuses being structured in stock options and that contributed to the bubble at the end of the decade.