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Banker bonuses falling amid new calls to ban them all together

November 8, 2011 |  8:29 am

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For a Wall Street trader looking forward to her or his end-of-year bonus, this is not a good morning.

In the near term, it looks as though bonuses this year will be down as much as 20% to 30% from last year, according to a survey out today from a leading industry compensation consultant.

In the longer term, Nassim Taleb, author of "The Black Swan" and one of the most respected prognosticators in the financial world, wrote in the New York Times that bonuses should disappear altogether, at least for firms that could be bailed out by the government. 

Taleb repeated the somewhat familiar argument that bonuses create incentives for bankers to take big risks while not punishing them when those risks go bad. He throws in a comparison to the pay arrangements in other risky fields:

Consider that we trust military and homeland security personnel with our lives, yet we don’t give them lavish bonuses. They get promotions and the honor of a job well done if they succeed, and the severe disincentive of shame if they fail. For bankers, it is the opposite: a bonus if they make short-term profits and a bailout if they go bust. The question of talent is a red herring: Having worked with both groups, I can tell you that military and security people are not only more careful about safety, but also have far greater technical skill, than bankers.

Bankers are certainly grumbling over their granola this morning. But the most immediate public response came from the economics blogger at the Atlantic magazine, Daniel Indiviglio, who said that following Taleb's prescription might actually increase risk-taking. According to Indiviglio, if bonuses were banned, bankers would simply receive all of their compensation in a fixed salary that could not be clawed back. At least under the current system, Indiviglio said, bankers get some of their bonus in stock, which goes down in value if the bank does poorly.

Think about it: if trades go bad, then shareholders will suffer by seeing dividends cut or shares diluted when more capital must be acquired. But every time banks have a good year, bankers will get a nice salary bump -- and that amount will be guaranteed even in bad years. Remember those guaranteed bonuses everybody was angry about a few years ago? If you were to pay a guaranteed bonus out over the course of a year in semimonthly installments, you could call it something else: a "salary."

Whatever the result of this debate, bankers are already looking at shrinking bonuses. The compensation consultancy Johnson Associates said in its survey that new regulations and slow economic growth will lead to smaller bonuses, especially in the traditionally lucrative bond- and stock-trading operations. 

Even with all the gloom, at least one group is getting higher bonuses than might be expected. The Daily Telegraph reported today that MF Global, the trading firm that went bankrupt last week, gave bonuses to its employees in London just hours before the company declared bankruptcy.


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-- Nathaniel Popper in New York

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