My Bonus Was Too Small!

In 2008, during the darkest hours of the global financial crisis, true heroes emerged on Wall Street. Skilled professionals were sent in to clean up the mess, and some reduced losses by hundreds of millions, even billions of dollars. Financing desks kept firms alive every single day.

Certain traders navigated safely through neck-snapping volatility, generating real revenue while reducing risk. Without them, losses would have been multiple billions worse, and the list of financial institutions signing up for bailouts would be much, much longer.

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These heroes—and I include myself among them—deserve to be rewarded. I believe my bonus last year was too low, given what I accomplished. Yes, it's hard to feel sorry for someone who makes more than $400,000 a year. But is it crazy to suggest that if I had a true, positive economic effect on my firm of $100 million dollars, that I should receive 1% of that number as compensation?

American taxpayers have a right to be absolutely furious, but their anger should be directed at bonuses paid to my colleagues in prior years. Bankers and traders churned out artificial profits and revenues, got paid lots of cash for it, and left institutions saddled with the risks and losses that my colleagues and I are mopping up now.

It's a different crowd doing the cleanup. Many of the folks who were responsible for putting on these trades in the first place are long gone. Some of them were even able to secure obscenely large pay contracts with other firms. Sickening, but true.

Now, there's no question that the way banks pay their people is wrong and has to change. But the government is going about it entirely the wrong way. Salary caps take out the incentive element of compensation, make absolutely no sense and are destroying capitalism.

No one should complain about bankers and traders receiving bonuses—even sizable ones—as long as their pay directly and accurately reflects the value they created. The only way to ensure that it does—and a few banks have already adopted this pay structure—is to award a performance bonus annually, but pay it out over a much longer period of time, perhaps five years.

Clawback provisions are necessary. Firms should recoup cash if future losses can be directly tied to the profits from which the bonus was paid. This will increase direct accountability and encourage risk managers to think twice before throwing the bank's capital onto sinking ships.

We're now facing "brain drain" in the industry. Talented people will leave the business. Wall Street will no longer attract the best and brightest graduates from the world's great universities. I don't necessarily think this is a bad thing. I used to actively recruit analysts and associates from my Ivy League alma mater.

I often found myself sitting in a room for a day of interviews, in which brilliant young people with impressive résumés and perfect transcripts from the molecular biology, astrophysics, mechanical engineering and mathematics departments would march in and tell me why they wanted so badly to work in finance.

Of course, I could hardly blame them, since I also went to Wall Street for the money. But I can't help but think our economy might recover more quickly and enjoy more real growth if these bright young things begin applying their skills to innovate in other fields. We need our greatest math and engineering minds ensuring the United States is the leader in innovation in technology, energy and medicine. We don't need them brewing up esoteric financial instruments.

The author works on the credit-trading desk at a major Wall Street bank.

© 2009