My Bonus Policy

Companies are currently coming under fire for giving out bonuses while laying people off, and the ones who are giving out big bonuses while laying people off and accepting public money to stay afloat are downright reviled. In most cases, rightfully so, but I want to make a brief argument IN FAVOR of giving out bonuses to certain kinds of people, and those people are the ones who helped company performance by predicting the downturn, the bursting of the real estate bubble, and the credit crunch and the people who took steps to mitigate the risk. If companies don’t reward those people, or aren’t allowed to, then it creates a massive disincentive in the future for people to tell the truth, especially when it’s bad news. People already don’t like making bad predictions or giving bad news to superiors, but we’re on the verge of creating an incentive structure in which people ONLY make money by predicting good things and then having them happen.

•If an analyst predicts good things and he’s wrong, low compensation, less job security.

•If an analyst predicts bad things and he’s wrong, low compensation, seen as a pessimist/downer/disloyal.

•If an analyst predicts good things and he’s right, big bonus for being right and helping the company prepare.

•If an analyst predicts bad things and he’s right…low compensation and less job security? Really?

OK, now pretend you’re an analyst and the CEO says “Hey, we’ve got all these subprime mortgage loans on the books. Do you think we should buy more?” If you say yes, your fortunes are tied to those loans. But if you say no, even if you’re right you’re screwed because the company’s so heavily exposed to them anyway, the bad year causes you to get a crappy bonus anyway! So less risk for you means more risk for the financial system.

We should find a way to reward those most prescient, and send a message to future generations of economists, bankers, financiers and analysts that good work will be rewarded, because the difference between getting good analysis and having people game the system for their own benefit is exponentially greater than the hit companies and taxpayers take giving out bonuses even in the worst of times.

I’m not saying we should be paying for multi-million dollar office redecorations, but some people actually deserve bonuses, and for the sake of our future economy, they should get them.