Taxing Bonuses – Can’t We Ever Get This Right

What’s wrong with wall street bonuses paid in deferred stock with a 2 year look-back.  If you lose money the next year then there is an allowance to claim some or all of the prior year’s bonus.  That’s it. 

If an institution that has received a government loan makes a good hire then he will want a competitive offer. It’s true that right now most places aren’t paying that well but they are paying better than whatever you’ll get after a 90% tax rate.  Every bank with a loan will get the worst of the worst so we’ll never get any of the loan back, or at least it will take a lot longer when you have the worst talent in the world.

If the US government owns a majority of the stock then that is a special case (AIG).  If we have only made a loan (and taken very little equity) then compensation is set by the board of directors.  That’s the law.

Popular outrage is not with the bonuses themselves, it’s with the contradiction between huge losses and big bonuses.  It’s with gross mismanagement and a complete failure to regulate. 

Stupid populism makes bad policy.

2 thoughts on “Taxing Bonuses – Can’t We Ever Get This Right”

  1. From 1942 through 1964 the top marginal tax rate was between 82-92%, so 90% is not a figure out of the blue. In any case, Hauser’s Law says that it doesn’t really matter what the top marginal rate is, the IRS’s take will be a constant 19.5% of GDP. Bonusgate, however, was entirely predictable when the original TARP legislation did not follow the British example and cap pay at recipient companies at $500K/yr. I think Wall Street thought it had a “whew, dodged that bullet” moment then which proved to be short-lived. The tax is however a crude tool to assuage the populist rage now gripping the economy. Wait until the profits of the new Geithner plan are realized and get “outed”, with hedge fund “investors” reaping leveraged rewards with no downside risk! It’ll make AIG look like pocket change in the fountain of Trevi…

  2. Geithner’s NY Fed team knew about this bonus plan before the gov’t ever “leant” AIG a dime so you can’t fault the recipients. But let’s face it, the bonus arguments that Board comp committee consultants have used for years is a joke: (a) if we don’t pay them these outrageous amounts of $$ they will flee and go elsewhere, and (b) we need it to attract the best & brightest. Well, (a) where are all the folks going to flee to and (b) the best & brightest got us into this mess. I am all for proper incentive comp but I also believe that shareholders should vote on the comp packages as opposed to the clubby board of directors who are in the back pockets of the recipients. I’ll gladly approve paying my management fantastic bonuses if they make me (as owner) a bundle.

Leave a Reply

Your email address will not be published. Required fields are marked *