For years, investment banks have paid their stars relatively low salaries and astronomically high bonuses.
But that ritual could change soon. That's partly because such a compensation structure arguably encourages excessive risk-taking, and banks are under pressure to quash any of the practices that helped cause the current financial meltdown.
Bonuses at banks that have received government loans are a prime target for the wrath of legislators and the public – bonuses are easier to understand than, say, credit-default swaps – and can even yield names and faces for people to pin their anger on. On Thursday, the House voted to levy a 90 percent tax on the bonuses of big earners at banks that have received loans from the Troubled Asset Relief Program, or TARP.
Changing the pay structure of investment bankers, so that salaries are higher and bonuses are lower, is "long overdue," said Alan Johnson of Johnson Associates Inc., a New York compensation consulting firm. "This is one of the few things where the bankers, the consultants and the regulators all agree."
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In an interview with the Observer this week, Bank of America chief executive Ken Lewis said he expects banks will shift their pay structures in that way. And that "could be something that is very good," Lewis said, since the current pay structure encouraged "behavior that was not appropriate."
Such a pay structure can create a stressful and chaotic environment within a company, Johnson added. "There is the possibility that people take risks just so they can earn a pay that they can live on," he said.
Others say that, in a good economy, bankers began to view their bonuses as entitlements instead of as performance pay – another incentive against being prudent.
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