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An Enormous Figure Lesson: How Companies ‘Properly’ Compensate Their Employees

by on February 12, 2010

While others are gradually recovering from financial tsunami, some companies express astonishing vitality, playing over their heads and are currently leading the score board. Goldman Sachs, for example, earned $13.4 billion (Net income) in 2009 that is over five times more than it is in 2008 ($2.3 billion). The bank recently declared that in order to displaying “restraint”, it would cut down its bonus payouts to its top-performance employees. However, an average pay packet of nearly $500,000 ($16.2 billion in total) can still easily provoke lots of anger in this time. On the other hand, JPMorgan Chase, one of the largest U.S. banks, reported a $117 billion revenue in 2009; the total payout salary (includes bonus) to its investment bank employees are $9.3 billion, the average 2009 annual salary of each employee is $380,000.

This paper highlights the challenges of finding a balance point between compensation and preventing employees from their being opportunistic to find shortcuts to achieve goals. We all know that financial and high-technology are two industries that require really hard work to achieve certain performance. Companies often use lots of bonus to attract talents and to retain professionals. In this paper I talk about the story of three well-known investment banks – Goldman Sachs, JPMorgan Chase, and the Royal Bank of Scotland that were infamously “generous” that pay their employees lots of year-end bonuses and this generosity has finally resulted in the financial tsunami in 2008. Finally I will propose two possible solutions to this issue.

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2 Comments
  1. Well, I also discussed compensation strategy in my emerging issue paper. I agree that “Companies often use lots of bonus to attract talents and to retain professionals.” In fact, one company named “Brand Velocity” brings up a new perspective of compensation strategy. It offers employees a base salary while much of their remuneration is determined by a points system, with points awarded for three—and only three—things: selling great work, delivering great work, and recruiting and developing great talent. I think they are innovative to create a reasonable and efficient compensation mechanism to reward high-performance employees. http://www.businessweek.com/managing/content/may2009/ca2009051_721238.htm

  2. Jordan Eschler permalink

    I would be interested to read both of your recommendations for solving the compensation issue.

    In my opinion, the reality is, everyone hears these outrageous figures related to compensation and assumes traders make some sort of reasonable base salary. In most cases, they don’t. [1]

    Second of all, the public outrage related to bonus payouts has more to do with how the financial bailout was handled by the Federal government. Should traders still be receiving these bonuses from institutions that are, in essence, public institutions? [2 NOTE: this is Matt Taibbi, who is brilliant but unfortunately resorts to profanity to express himself]

    For an example of a wider-reaching implication of bonus structures on Wall Street, it has been demonstrated that the Manhattan real estate market is tied closely to the bonus structure at these firms. [3] Roberts discusses such a case related to Japan’s economic downturn (Roberts, 70).

    [1] http://www.nytimes.com/2009/03/25/opinion/25desantis.html?_r=1

    [2] http://www.rollingstone.com/politics/story/29127316/the_great_american_bubble_machine

    [3] http://online.wsj.com/article/SB10001424052748703672104574654812580706286.html

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