Bankrupt Bonus the Economic Crisis

Bankrupt Bonus

The Economic Crisis and Banking Industry Bonuses: When Moral and Financial Bankruptcy Collide

It is probably not too surprising to most news-conscious Americans that huge bonuses were handed out at companies that were shedding employees by the thousands, forced into buy-outs due to an utter lack of solvency, and/or receiving billions of dollars of taxpayer's money in order to keep themselves afloat after making disastrous business decisions based on nothing more than greed. It was, in many ways, business as usual in the banking and financial sector; executive bonuses, severance packages, and retirement benefits have grown dramatically over the past several decades, and t appears that golden parachutes are still widely available even when the plane is completely ablaze and aimed at crashing into a mountain. Yet an examination of some of the specific instances of the largesse some executives received might raise the public ire just enough to force some sort of change.

This is exactly what Senator Dodd insisted he would do back in January, after many companies who had received funds under the first Troubled Asset Relief Program gave out the sixth largest collective bonus packages to its executives in recorded history (Kopecki & Goldman 2009). There have been some apologies and some returns, but the upshot of the entire situation is that many of the men who were centrally responsible for the financial meltdown received many millions of dollars, while the less-well-positioned employees of this company lost their salaries and their pensions. Meanwhile, these bonuses were funded -- whether directly or indirectly is a matter of rather pointless debate -- by taxpayers who, in general, have also been much harder hit by the economic downturn than these executives.

Dodd's attempts to correct this issue, or rather to prevent its reoccurrence, might have been too over-zealous, however. Several weeks following the disclosure of the executive bonuses and the initial outrage, Dodd introduced language into the TARP II legislation that would limit bonuses and other former of extra-salary compensation for hug swaths of employees at companies receiving TARP funds, including sales forces and others that traditionally receive the bulk of their compensation through non-salary bonuses, commissions, etc. (Oliphant 2009). The White House even acknowledged that this might be counterproductive to the purposes of the bailout funds, which was to stimulate the economy through increasing the availability of credit (Oliphant 2009). There is no question in the federal government, however, that executive compensation had to be severely curbed.

Of course, this problem predates the most recent economic meltdown by a fair amount. Amidst the WorldCom scandal of 2002, when "creative accounting" methods allowed the company's chief financial officer to turn a $1.2 billion loss into a profit by lasting $4 billion in expenses as investments, the company's director received over seventy million dollars in compensation with no performance justification (English 2002). Though the director claimed to have no knowledge of the accounting fraud, analysts wonder what other than his silence could possibly warrant such a high compensation package (English 2002). This is yet another company where slews of jobs were lost, pensions and benefits disappeared, and yet many top executives received lucrative compensation and severance packages, five years before any TARP funds were available to provide them.

There is some hope that the situation might change, however. In the wake of the financial scandal, and even in the years leading up to it, many CEOs signed deals agreeing to limit their own pay should their companies hit troubled waters (Penttila 2009). Congress has also been considering legislation that would either directly limit executive compensation in public companies, or allow for direct shareholder say in the compensation of company officers, but often this type of "consideration" is really political double-speak for seeming active until the wave of public sentiment dies down and business can proceed as usual (Penttila 2009). There is, however, increasing evidence of performance-based pay structures for executives, meaning that they won't emerge with millions of dollars after driving their companies into the ground -- if these practices are actually put into place.