What is wrong here?

“Retention bonuses” would seem to be bonuses by any other name.  Obviously, public and political scrutiny is at super high levels as we reel from the financial crisis.

This little nugget caught my eye about a joint venture between Citigroup and Morgan Stanley:

According to the newspaper [The WSJ], not all of the joint venture’s 20,000 brokers would get retention payments. It said a broker who brought in $1 million in revenue last year might expect to get $500,000 to $1 million, depending on how much he continues to produce.

Of course, both got TARP funds. [For more on TARP, see coverage of TARP overseer appointed by congress: Elizabeth Warren. A group blog she is part of that covers finance, especially in terms of consumers and policy: Warren Reports.]

Citigroup: $45 billion

Morgan Stanley: $10 billion

More oversight coverage.

So, a broker brings in $1 million in revenue.  In revenue.  Not income or profit.   Said trader now qualifies for a bonus on top of salary for up to $1 million.  Am I missing something here?  Has the bank just paid someone the same amount they brought in?  As it is a retention bonus, I suppose the idea is that Taki the broker (not Joe), will bring in a lot more than $1 million this year and could easily jump ship if he wanted to taking those trades (are they socially embedded?) with him.

Or is it to keep Taki the trader around so that short term his revenue keeps coming maintaining cash flow on the books so the zombie bank can continue lumbering around hoping that  the bad debt it is carrying will somehow just go away.  And unicorns and ponies for everybody!   Where have I seen unsustainable short-term strategies used to justify long term growth before?  Hmmmm…. Enron?

Can anyone make better sense of this report?  Sloppy journalism?

Advertisements

3 Responses

  1. […] David Teather added an interesting post today on What is wrong here?Here’s a small reading “Retention bonuses” would seem to be bonuses by ay other name.  Obviously, public and political scrutiny is at super high levels as we reel from the financial crisis. This little nugget caught my eye about a joint venture between Citigroup and Morgan Stanley: According to the newspaper [The WSJ], not all of the joint venture’s 20,000 brokers would get retention payments. It said a broker who brought in $1 million in revenue last year might expect to get $500,000 to $1 million, depending on h […]

  2. A finance professor reminded me that brokers are usually compensated only with commissions. It would be nice to know if these bonuses are on top off some sort of commission.

  3. Comment From BU Finance Professor Skip McGoun

    Good point. If “revenue” is correct, they appear to be assuming that all fixed costs have been covered and that this is all incremental revenue with essentially no variable costs. This thinking is not unknown in finance. “Overhead” is ignored in capital budgeting decisions, but of course if no project is required to generate a contribution towards overhead, how is it covered?

    Skip

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: