TW: Certainly bonuses within the financial industry have received much press. I would argue executive bonuses generally are outrageous with the system stacked in favor of the executive. Top executives (not middle and lower levels) are uniquely positioned due to their power status and uniquely motivated by their insane egos to create bonus systems oriented to maximize their payouts while minimizing their risks. Not all plans are crap obviously but the inherent incentives exist.
The most troubling problem is mentioned in the article, it is not that the executives are malicious or merely exerting their power, they just did not know what the hell they were doing. When lifelong or at least career long paradigms go poof expect chaos.
From Economist:
"...The case against banks goes something like this. Over the past 25 years, the cost of finance has been low and asset prices have generally been rising. That has encouraged banks to use more leverage in order to earn high returns on equity. The process of lending money against the security of assets, or trading assets with the banks’ capital, helped to push asset prices even higher. A sizeable proportion of the profits that resulted from all this activity was then handed out to employees in the form of wages and bonuses.
But when asset prices started to fall, the whole system unravelled. Banks were forced to cut the amounts that they had borrowed, putting further downward pressure on prices. The “shadow banking system”, which relied on bank finance, started to default. The result was losses that outweighed the profits built up in the good years; Merrill Lynch lost $15.3 billion in the fourth quarter of 2008 alone, compared with the $12.6 billion of post-tax profits it earned in 2005 and 2006 combined.
In effect, executives and employees were given a call option on the markets by the banking system. They took most of the profits when the market was booming and shareholders bore the bulk of the losses during the bust.
...Why then were bankers not more cautious, given the risks to their own wealth?
There were two main reasons. First, their base packages (pay and cash bonuses) were sufficiently large to make them feel financially secure. That gave bankers a licence to gamble in the hope of earning the humungous payouts that would take them into the ranks of the über-wealthy. The second reason was that the bankers simply did not recognise the risks they were taking..."
http://www.economist.com/finance/displaystory.cfm?story_id=13036810
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