Bonus II

In an earlier post, I wrote about the announcement of Wall Street bonuses and got some thoughtful feedback from a couple of followers of this blog (see "Bonus" on this page). I don't think anyone (and I truly mean anyone) fully understands the compensation packages of many jobs, particularly where there is no contract (union or individual) to help make sense of it.

I do know that in a market economy like ours, it seems as if careers like public and private primary and secondary school teaching are undervalued from a compensation perspective. Why then do so many college graduates continue to choose to teach? If we reach back to the 1950s and 60s, it's easier to understand. Many other careers were practically closed off to smart, well-educated women. Nursing, teaching, social work and a very small number of other professions attracted most of the smartest female college graduates. The salaries were pathetically low by today's standards but without other meaningful opportunities, the market permitted school districts and religious institutions to get these young women (and quite a few men) to work for them for peanuts. But let's not forget that teaching has intrinsic rewards and has historically been one of the most stable, family-friendly jobs in the country. Defined benefit public employee pensions (often non-contributory) make retired teachers some of the best protected among our elderly. It's easy to say that they deserve that kind of protection because they chose to forgo opportunities to make more salary in another field but with reduced job security and increased risk of having a less generous retirement income.

The best and brightest women today can and do often choose to work in money management jobs, including investment banking, abandoning the notion of lifetime employment with one employer, lower pension guarantees, practically zero job security and punishing 80 hour work weeks. The annual bonus - whether delivered in cash or stock options - often accounts for 60-80% of their overall compensation. In the fat middle (the VP and AVP level where most of men and women in institutional finance work) much of the bonus gets socked away for retirement. I don't know what the average compensation is but in order for a 55 year old banker (who, by the way, likely has to pay 3-4 times the average for housing because they are forced to work in New York, Boston or Chicago) to buy an annuity that would provide them with a lifetime income equivalent to a teacher's pension, with continued health care coverage, would likely have to amass at least $1-2 million in cash. When one considers the 80 hour work weeks and the risk that bonuses paid in stock options might be worthless (ask a Bear Stearns employee who had all of his/her retirement accounts in now worthless company stock), it should surprise no one that these individuals can make a good case for getting a healthy end-year bonus if they have worked hard and followed the direction of the top company executives.

Men and women working in the auto industry, unlike public school teaching and investment banking, have increasingly gotten the worst of both worlds - decent but not spectacular hourly pay for current workers, a lower entry wage for new hires, but no guarantee of job security and a pension that might or might not include retiree health benefits, particularly if the auto manufacturer goes bankrupt. The old social contract with these workers died long ago. Even so, when the auto manufacturers asked for a bail out, many people reacted with disdain not just for the top executives but for the workers themselves. I suppose that we should have expected the workers to refuse to build gas guzzling SUVs because they should have known that crude oil prices would spike and the home mortgage industry would start an economic recession that would further reduce demand for the types of vehicles that had been so profitable for so long.

My point is this: we have collectively become the judge and jury of what an individual's work is worth, regardless of the product or service they deliver. That, my friends, is not how market capitalism works. I will agree that no one necessarily deserves a $20 million dollar bonus. I cannot agree that an exceptional employee in the ranks of middle management doesn't deserve a $1 million bonus even if the top company executives made mistakes in the overall direction of the company.

AIG made some egregiously poor institutional decisions - particularly in greedily selling "insurance" to banks that it could never have afforded to pay out if the economy went sour. But the middle managers who sold those products did nothing illegal and to the extent they did their part well, deserve the compensation promised to them. Teachers whose school boards and management give them a curriculum and blackboard still deserve their salary and pension benefits if they do their jobs acceptably, even if it doesn't translate into higher test scores. Auto workers who dutifully show up for work each day and drop 400hp engines into Hummers that get 9 mpg deserve their compensation even if the car can't be sold.

Bonuses didn't get us into this mess. Congress's utter failure to regulate the industry over the past decade is a big part of what got us here. I'll bet you that they wouldn't forgo their salary for failing to legislate away some of the legal but stupid things going on in the finance industry.