Growth5 Blog

Monday, March 30, 2009

Bank of America: Redefining Bonuses

On Thursday we covered the definition of the word "bonus". It can mean different things to the public, the government and certainly financial institutions.

In an effort to prevent a public outrage similar to what AIG went thru, Bank of America has decided to raise the salaries of some of its top dealmakers by 70%. B of A is up to $45 billion in bailout money and appears to be proactively making moves to retain its top people if the govt. imposes sharp bonus restrictions on institutions that have received bailout money.

Bloomberg reports:
  • “The concepts we are considering would not increase total compensation,” Brian Moynihan, Bank of America’s president of investment banking and wealth management, wrote yesterday in a memo to employees obtained by Bloomberg News. “Rather, we believe it is responsible, and consistent with the emerging public consensus, that a greater percentage of overall compensation come from fixed base salary.”
  • Bonuses will become a “smaller” portion of total compensation, Moynihan wrote in the memo. “In view of the public concerns about executive compensation, changes in the market, and the need to create a more sustainable compensation culture, all the major financial institutions are evaluating compensation practices.”
If these are the salaries the banks need to pay to retain their top people (market value), so be it. We want these banks to keep their top people so they can pay the govt. back. However, the only way these dealmakers should receive any "bonuses" on top of their base salaries are under the following circumstances:

1) the company has made a profit for the year;
2) the company retains a % of the profit for next year's cash flow; and
3) the US govt./taxpayers have been paid back in full.

Give them the base salaries to keep them, and make sure they have incentives aligned with the govt/taxpayers to earn more.

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