I read an article by Randall Smith in The Wall Street Journal titled Aligning Incentives with Corporate Success and Corporate Goals last Thursday.

The article was focused on the trend toward declining bonuses for different positions within the financial community. Based on projections by two compensation experts, bonus payments in finance roles will drop between 20% and 50% across the board, with the deepest cuts affecting bankers and traders in businesses that blew up during the credit crisis. The article also stated that star performers will see their pay stagnating at last year's levels, while everyone else's pay will be down 40% to 75%.

Wow, your company blows up (his words, not mine) and your incentives only drop 20% to 50%? Something seems inherently wrong with that formula.

Smith goes on to say that chief and other top executive bonus pay - which must be disclosed to shareholders - for the next year is projected to tumble 60% to 70%. In particularly hard-hit areas, which churned out collateralized debt obligations that blew holes in many Wall Street balance sheets, managing directors could potentially see their bonuses fall 50%, to $750,000 to $950,000 (their base pay is about $200,000 a year). Less senior employees will also see their bonus drop to between $200,000 and $250,000, on top of an average base of $140,000.

Considering most, if not all of these companies incurred huge losses this year, it seems strange to me that top management is still on track to earn any bonuses, that while lower than what they are used to, are still much higher than the average Joe's. I wonder what shareholders who lost significant amounts of money in the financial meltdown think of Managing Directors still making close to million dollar bonuses?

Smith wraps up the article by stating that in the coming years Wall Street firms may reform their bonus processes by shifting towards a multi-year, performance-based pay structure.

While I understand that market conditions and competitive pay rates determine how companies salary and incent their employees, from my experience, pay-for-performance incentive schemes tend to produce just that - superior performance.  A pay-for-performance system on Wall Street would mean that companies actually need to make money (what a novel idea), or at least not spiral to the point where they need multi-billion bailout loans from the government.

I look forward to seeing how Wall Street bonuses shape up in the future and whether financial institutions will end up changing their incentives models to align with performance or dare I say reality....

Got an opinion on executive bonus pay?  I'd LOVE to hear about it!