Expert Perspective by Grahall’s OmniMedia Editorial Board
In his New York Times article published on August 10, 2009 “Effort to Rein in Pay on Wall Street Hits New Hurdle” author Eric Dash says: “… on Wall Street, banks have become so eager to lure and keep top deal makers and traders that they are reviving the practice of offering ironclad, multimillion-dollar payouts — guaranteed, no matter how an employee performs.”
Not only will these guaranteed bonuses for the already wealthy Wall Streeters surely irk the public but “… Britain’s banking watchdog, the Financial Services Authority, [warns] that the widespread use of guarantees ‘may be inconsistent with effective risk management’.”
With all the world focused on how compensation can impact the risk dynamic, we thought we would weigh in on the subject of guaranteed bonuses and their apparent risks.
First, although counter intuitive, and perhaps counter cultural in today’s “let’s beat up wealthy Wall Streeters” mentality, guaranteed bonuses might be a lower risk alternative to stock options. Options, as you know, are valuable only if the stock price rises, the higher the better. And obviously, a short-term need to drive up the stock price can lead to risky behaviors.
On the other hand, if the guaranteed bonus provides a “floor” for compensation opportunity, regardless of individual performance, then a guarantee might drive the executive to take excessive risks to achieve even greater compensation, since he knows he won’t “lose it all” if he makes a bad bet or two.
But we think more basic questions arise beyond the impact of these bonuses on risk. What are these companies trying to accomplish? What messages are they intentionally – or more likely unintentionally – sending to the guaranteed bonus recipients and to the “non-guaranteed” employees.
“Are these companies trying to buy loyalty?” asked Grahall’s Robert Cirkiel. In study after study, employees have indicated that pay is not their most important connector with their employer. And if it’s not loyalty the companies are buying, then what?
Guaranteed bonuses run the risk of creating a separate class of “employee contractors.” These bonuses seem a lot like a retainer or a contract payment. Once the “contract is up” will the company decide they are also finished with the employee? For this small group of employees with a guaranteed bonus (perhaps it is 10% or less of the total employee population), the relationship with the company is purely financial. Could that be damaging for the 90%+ of employees who are working at the company for one of the many reasons deemed more important than cash?
How will housing two types of workforces – contract employee “gunslingers” and hard working loyalists – change corporate culture? If the contract pay is much better, won’t all employees strive to become the contract employees? And if that happens, can a company really succeed long term if its entire workforce acts based on personal interest, rather than the best interest of all stakeholders? A fundamental question emerges – Do mercenaries or patriots make better soldiers?
Grahall will be monitoring the use and impact of guaranteed bonuses and will report on the answers to the questions above.
Contact Grahall’s OmniMedia Editorial Director at email@example.com