Thursday, December 8, 2011

Modest Bonus Year on Wall St., but Stock Could Yield Fortunes, The New York Times, December 3, 2011

Any one who regularly reads, watches, or listens to mainstream news media sources knows that the outlook for the American economy is much worse than it was a year ago when 2010 finished strong and investors were looking towards another year of big gains. Even occasional news absorbers have been exposed to the countless number of articles in 2011 related to U.S. Congress budget fights, debt ceiling deadlines, Europe's debt woes, and the first ever rating agency downgrade of the U.S. credit rating. Contrary to this collection of dooming news, the economy continues to function and an overwhelming majority of the labor force have jobs and receive pay checks.

This article discusses the effects of this year's macro level economic environment on the paychecks and bonuses of bankers, a industry of workers that have been closely watched since the credit crisis in 2008. Top banking executives receive most of their bonus compensation in the form of equity through restricted stock and stock options rather than cash. This form of compensation is often praised because it attempts to align the executives' interests with the interests of the shareholders of the company (usually preserving and creating value). However, this article discusses the benefits of being payed with equity in bleak economic times. The value of bankers' bonuses can rise (or fall) with the success (or failure) of the company. Bankers have a reason therefore to be excited about depressed share prices of the company in the short run until bonuses are granted because the value of their bonus will have more room to increase. While this short term misalignment of interests contradicts a a main purpose of equity bonuses, the restrictions on the use of these equity payments likely preserves the shareholder desired long term interest alignment effect.

You can find the original article here on the New York Times website.

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