Posted tagged ‘bonus’

All the Important Stories Without the Word “Commode” in Them

January 27, 2009

We learned a lot today, although tomorrow we might find that we learned completely different things. Here are the articles that prove the idiom, “When it rains it pours.”

1. Citi, in what can only be described as a series of epic P.R. fails, purchased a $50 million jet. Next in the series was this paragraph from DealBook:

A Citigroup spokesperson told DealBook that he could not confirm the reports that the bank was set to take control of a new jet, citing “security” concerns. “Executives are encouraged to fly commercial whenever possible to reduce expenses,” Citi said in a statement.

Seriously? Security concerns? Now, there are some rumblings that the jet was purchased two years ago. However, if there was ever a time to wage the P.R. war and risk getting sued to keep the big picture impression of your firm together, this was it. I can, without a doubt, say that if I were sitting in Vikram’s seat I would be refusing to pay for the jet or take delivery of it, and would be doing whatever I could to be sued. The headline, “Citi Sued for Failing to Honor Commitment to Purchase Corporate Jet” sounds like music compared to “Citigroup Likely to Face Criticism Over Jet” (the actual DealBook headline).

And in the end, they ceded the ground anyway.

2. Congratulations, you’ve hired some lobbyists! It turns out that a whole bunch of firms, including Citi, American Express, Capital One, Goldman Sachs, KeyCorp, Morgan Stanley, PNC and Bank of New York Mellon, all hired lobbyists. The whole notion of a company hiring a lobbyist, clearly, leads to obvious questions about companies representing their own interests and those of their shareholders instead of those of the people (who, now, are also their shareholders). I can’t possibly imagine what firms are thinking when they hire these lobbyists, except that they will “get away with it.” Absolutely ridiculous.

And, no sooner than I had noted this, newly confirmed Treasury Secretary Geithner cracks down on lobbying.

3. Apparently, Bank of America approved everything they used against John Thain when it came time to push him out. From the Elusive January 23rd version of the WSJ article:

Thain also left for a vacation in Vail, Colo., after the losses came to light, accelerated bonus payments at Merrill so they could be collected before the end of the year and scheduled a trip this week to attend the World Economic Forum in Davos, Switzerland […]

Vitriol between the Bank of America and Merrill camps also stemmed from the fact that Merrill had paid out bonuses much earlier than expected. A person familiar with Merrill’s bonus scheme said executives typically are told what their bonus will be by the second week of January and the payments are made in the second half of the month. Some people inside Bank of America believe Merrill accelerated the payouts to avoid having them cut amid a much-leaner plan at Bank of America.

(Emphasis mine.)

And, from the FT:

Ken Lewis, BofA’s embattled chief executive, ousted Mr Thain on Thursday after news of the bonus payments appeared in the Financial Times. BofA told the FT last week that Mr Thain had made the decision to pay bonuses in December instead of January and it had been “informed” of the move. The bank said Merrill was an independent company until the deal closed on January 1.

[…]

BofA yesterday confirmed there were conversations about the bonus payments prior to the pay-outs: “We never said we didn’t talk with them about it. But, in the end, it was their decision and they informed us of it.”

(Emphasis mine.)

Jeeze. Ken Lewis needs to go… His P.R. war to keep his job despite fleecing taxpayers is pathetic.

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This is compensation, it is also a game.

February 6, 2008

I wonder how compensation would be a different process if it was more strategic. The way it currently works is a number is handed down to someone senior. “Your division’s bonus pool is X, it is [up/down] Y%.” For this year, for example, securitized products might have had a bonus pool that was down 50-70%. So the person who gets this news then allocates two layers–the bonus pools for the groups that report to them are then allocated as well as the bonuses of the people who directly report to him/her are decided (as their bonus was most likely decided by the person who delivered the new size of the bonus pool).

There is an interesting subtlety. One doesn’t have any say in one’s own bonus–it comes from above. Common sense tells us that this is the correct and accurate way to do it, no? Well, let’s think about this for a second. What if a group of revenue generating employees was  grouped together, and given a bonus pool size. They were then told they had to agree and that someone above them would veto completely ridiculous allocations (“I’ll get all of it next year and none this year.” “I won’t agree to anything except 90% of the bonus pool.”).  What should happen? As with anything in finance, let’s make some assumptions:

  • Dollars to allocate: $1,000,000
  • Revenue generated: $10,000,000
  • Number of people: 4
  • Revenue generated by person: Person 1 (P1) generated $2,000,000 in revenue, Person 2 (P2) generated $1,000,000 in revenue, Person 3 (P3) generated $5,000,000 in revenue, Person 4 (P4) generated $2,000,000 in revenue.

Taking a simple approach, one might say that the correct way is to give each person the same percentage of the bonus as their percentage of the revenue they generated (e.g., P3 gets $500,000 bonus dollars because P3 generated 50% [5,000,000/10,000,000] of the revenue).  If someone were to force an inequitable allocation then the person who was given less than their fair share could simply leave and get another job (it’s not uncommon for a bad pay year to drive a senior person to another firm). Also, the subtlety here is that the people deciding the bonus allocation here understand, fully, what each other’s true contributions are. If P1 and P4 work together then how they account for their respective contributions will most likely show a more nuanced understanding of their actual contributions versus their perceived contributions. Perhaps P1 and P4 had an arrangement where extra work will be shared, or perhaps P1 did 90% of the work on something and then handed it to P4, where the credit was then given to P4 for the entire amount of revenue generated. Is this more fair? Perhaps. I find it quite common that very senior people will set bonuses for people they interact with very little.

Obviously a solution like this is rife with issues, and I would never claim something like this should be implemented. It is, however, definitely instructive to think about the situation and wonder how it differs from the status quo. What extra infromation comes into play that doesn’t in the current system? What would the difference be in someone’s pay if this system was adopted? Why? Just a thought.