Financial Industry Bonuses: So What
If you believe the network news, the recession is over. They practically invented the recession, to create dissatisfaction with the Bush administration. If I recall correctly, under W we had less than 3% unemployment, and about 3% inflation—about as close to perfect as you're going to get. Now, inflation is twice that, and unemployment is closing in on 10%. And they say the recession is over?
Financial headlines have been dominated by news of the big banks and their plan to hand out bonuses in the coming weeks. The White House is livid. And NBC News is trying to make you livid too. How COULD they? After WE bailed them out. "What can the government do," they ask? The White House says there isn't much they CAN do, because most of these banks have already paid back the bailout money from the government.
What??
You mean, we bailed them out, and then they gave us the money BACK? And we think that gives us the right to tell them what to do?
A lot of people predicted that this would happen. You let the government in your bed, and they think they can start dictating what color the sheets are. They're just as bad as the mafia.
The reason that people are so angry over bank executives receiving bonuses is that they don't understand how these people are motivated. Sure, they're motivated by greed, just like most of the rest of us. But what gets them working hard is the incentive. It is knowing that if they accomplish the goals set before them, they're going to have a huge pay day. In exchange for that, they're going to give up the guaranteed money.
Most people want to know exactly what their paycheck is going to be. But a fairly small percentage of people are bored by that. They know that their talents and abilities can produce a financial win-win. They are willing to bet a regular paycheck that they can make more on commissions and bonuses. They give up the security, they rely on their abilities. To do anything else would bore them to tears.
I once knew a guy who was being interviewed by a small company. His salary demands were too high for the company to afford, and he knew it. He told the owner of the company, "pay me minimum wage, and not a penny more. If I don't double your revenue in the first year, then minimum wage will be all I will earn. But if I do double your revenue, I get 10% as a bonus."
His goal was to double the company's revenue in the first year. His incentive, if he makes the goal, is ten percent of the company's revenue. What does the owner have to lose? Only the cost associated with paying an employee minimum wage. If that guy makes his goal, the owner makes a ton more money. The company grows. And that guy earns a massive bonus. Win-win.
And that is exactly what he did.
Banks are posting profits. The stock market is headed up again—by 53% since March of this year. The economy seems to be headed in the right direction. These guys did what they promised they would do, and now it is time to reward them for it. So why are people making such a big deal about it?
On the news this morning, I heard one guy (a reporter for the New York Times) say that banks aren't loaning money. Of course, he offered no proof. I think he is full of crap. I don't know what banks he is referring to, but our banks are loaning out tons of money. Every bank I know of is loaning out money. Sure, lending criteria is more strict than before, but that's okay. We don't want to loan money to people who aren't qualified anyway—that's part of what got us into this mess in the first place. So don't believe all the stuff spewing from the Times, and from network TV. Here in the trenches, money is being lent out every day.
This morning, as I was watching the reaction of people to these bonuses, something occurred to me. Where is the outrage over salary bonuses in the sports world? Tiger Woods recently passed the one billion dollar mark. Dude plays golf, makes a BILLION DOLLARS. LeBron James didn't even go to college, and he has earned over $40 million. Peyton Manning, $30 million. In the sports world, you don't even have to prove yourself. If you were good in college, you're going to get a signing bonus in the tens of millions of dollars, before you even try on the uniform. Why are people not outraged over that?
It seems to me that the liberals in Washington, who happen to currently be running the asylum, are trying to get the middle class all amped up over how unfair it is that some suit that works for a bank makes so much more money than they do. Lisa put it best. She said that when she decided to become a teacher, she knew she wouldn't make much money, so she is not going to get upset because someone else makes a lot more. She is happy, she is doing what she loves to do, and she has summers off. All the money in the world cannot replace being in love with what you do.
And now the White House is setting limits on how much money bank execs can earn. This might very well be the most stupid and dangerous thing they can do. Why? Because this is a highly competitive industry. You pay the most money to the best people, the people who are most likely to help you maximize profits. If their salaries are capped, the best talent will just go to a company where the salaries are not capped. This move by the White House "pay czar" (a scary term) is going to hamstring these companies, preventing them from returning to profitability. Which may be exactly what the White House wants to do—keep them from returning to profitability, thus increasing their dependence on the government.
Now I don't care how much money you make. If you earn it, it doesn't matter to me. But don't get all bent out of shape because someone makes a few million dollars more than you. Don't fall for White House tactics, trying to start a class war. First, because you could always make that much or more if you wanted to. And second, because people tend to earn money based on both the level of risk they are willing to take, and the amount of return they bring to the people with the money.
And there's nothing wrong with that, either on Wall Street, or on the playing field, or anyplace else.
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