Ramblings of Silver Blue

12 Oct

When Too Much Is Too Much

From CNN.

How much is too much pay?
When it comes to compensation, how do you define obscene? Here are a few criteria.
November 29, 2004: 9:34 AM EST
By Jeanne Sahadi, CNN/Money senior writer

NEW YORK (CNN/Money) – Everyone knows that investment bankers and traders can rake it in.

Still, it was staggering to learn the following from a recent Reuters report:

A typical senior investment banker making $200,000 in salary might get a $700,000 to $750,000 bonus this year. A senior bond trader with the same salary might get $1.4 million. A bank teller making $30,000, meanwhile, might pocket a whopping $2,200.

The investment banker’s administrative assistant does a bit better, with a salary between $45,000 and $65,000 and a bonus between $2,000 and $10,000, according to compensation consulting firm Johnson Associates.

So the banker makes a bonus equal to 375 percent of his salary, and the bond trader pulls in 700 percent of his pay. The teller and assistant, meanwhile, get a bonus worth anywhere from 7 percent to 15 percent of their annual wages.

That’s how the bonus game is played: big payouts reflect a fraction of the business the rainmakers and their units help generate, which is a similar argument used to justify $20 million movie stars. What’s more, the local economies and tax collectors benefit from those bonuses, too.

Still, it feels a little obscene.

Before you tell me I’m just jealous, let me say:

I’m all for paying the highest bonus to those bringing in the most business.

It’s reasonable to pay far higher salaries to top talent (e.g., star bankers) than to those easier to come by (e.g., competent assistants);

I don’t begrudge any hard-working individual a big paycheck so long as it’s earned fair and square.
But it’s still worth asking how much is too much?

There’s never going to be one answer, but maybe there are criteria that help frame the debate. For example:

Are we talking stupid money?
The investment banker’s bonus is a pittance compared with some of the glaring examples of what I call “pay me stupid money.”

These are the cases that clearly fall on the wrong side of reasonable, since they reward mediocrity or failure with massive payouts.

One getting a lot of attention lately is the $140 million pay package Michael Ovitz received for putting in an underwhelming 14 months as Disney’s president.

Or take the $20 million of cash that Home Depot has agreed to pay CEO Robert Nardelli should he ever be fired. He’s likely to walk away with tens of millions more, since the company also agreed to fully vest all his stock options, pay him the remainder of his yearly salary and other promised compensation.

How is that incentive to do a good job? If it’s intended as hush money for an unsuccessful tenure, why not mandate an executive’s silence or agreement not to sue in exchange for a far smaller, but still highly attractive and guaranteed, severance package?

Who’s working for whom here? Huge pay and exit packages mock the principle that CEOs and their high-level subordinates work for the shareholders.

Who gets first dibs?
When top earners improve business, they’re doing their jobs. A job well done is worthy of a cash reward, but several times their yearly salaries?

Why not plow more of the bonus and other cash compensation back into the company to improve business, boost the stock price or pay higher dividends?

Those top earners would still benefit since they’re shareholders, too.

What’s really a fair share?
Besides shareholders and top performers, those helping the rainmakers also deserve a bite of the pie.

“It’s everyone together that makes the value. They’re all playing a role, and if they’re not, they shouldn’t be there,” said Scott Klinger, a program co-director at the liberal nonprofit group United for a Fair Economy.

He suggests a system whereby everyone in a company – down to the cleaning staff — be paid the same percentage of their salary in bonus.

That could make it hard to attract the high-performing rainmakers.

But the broader point is well taken. Top dogs alone don’t make a business successful. Those at the bottom and middle rungs may deserve a bit more of the fat they helped to create.

Especially since their severance packages, if they get any, usually are measured in weeks of pay, not millions of dollars.

Does it pass the gut check?
But back to the Wall Street bonuses.

I once met a highly paid lawyer whose husband was a highly paid investment banker. They had a couple of kids and a nanny or two.

The woman characterized her husband’s salary as essentially nothing. It’s really all about the bonus, she explained. Relative to other pay packages in the industry, she had a point.

But when a six-figure salary (however low) is brazenly dismissed as “nothing” and the expectation is for a bonus several times that salary, call me crazy, but something is off.

Jeanne Sahadi writes about personal finance for CNN/Money. You can e-mail her about this or any other column at everydaymoney@cnnmoney.com.

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