Ethical Relevance of Paying Large Bonuses to Top Executives of Banks that Received Bailout - Term Paper Example

 “Ethical Relevance of Paying Large Bonuses to Top Executives of Banks that Received Bailout” Introduction The recent past witnessed the collapse of American and European banking industries which could be attributed to strategic flaws or managerial failures. The poor governmental regulations on banking sector also contributed to this disintegration. It is said that inefficient usage of monetary tools initiated by regulators was one of the main issues associated with the strategic failure of the banking industry, which intensified the scale of bailout. The act of providing additional capital to banks and other organizations when they face the danger of bankruptcy is called bailout. During the last few years, most of the major banks in America were provided with bailout money so that they would be saved from the danger of insolvency and thereby liquidation. Since banking sector is the growth engine of a nation’s economy, government must give great care to its maintenance. In addition, the regulators can also play a vital role in preventing the disastrous effects of bankruptcy by the effective application of various financial tools. This paper has been drafted with intent to explore the ethical range of paying large bonuses to top executives of major banks that received bailout money. Bailout and its impacts on economic sector The bank bailout has a far reaching impact on a nation’s economy as it is spent out of extra budgeted money. The general public of the nation largely suffers from the bank bailout since it leads to the downturn of economy. Similarly, many investors and shareholders may lose money on their investment due to the economic collapse of banks; and therefore they hesitate to go with further dealings. The foreign investors and companies may also lose their interest in a weaker banking sector and it would adversely affect the financial viability of the nation as a whole. In the opinion of McKay (2010), the taxpayer money has been employed to meet the cash reserve needs of the banks. The money from the treasury is used to carry out fund operations, if the banks have not repaid the money (pp. 50-51). Therefore, the Federal Reserve is forced to pay more money to the banking industry at the time of depression and it breaks balanced financial structure of the various policy based operations. McKay also indicates that the banks generally utilize the cash deposits from the customers to ‘purchase mortgage-backed securities, collateralized debt, and loan obligations. In most cases, they are valued worthless and it would badly impinge on the rate of return on bank’s transactions. Likewise, it is reported that some major American banks had inflated their profit in order to attract more investors and creditors. As a result, many creditors have not been still reimbursed for their claims. “When banks fail, getting credit and loans becomes more difficult. This makes the process more difficult for the people looking to buy cars, homes, and property and perhaps for students trying to obtain educational loans” (McKay,2010, p.53). Similarly, the businessmen would not get adequate assistance from the banks and it would impede the industrial growth of the country. The failure of banks and subsequent bailout leads to incredible job losses within the country. Moreover, when the banks are compelled to withstand with the bailout money, they cannot implement new policies and programs. In short, the process of bailout will certainly cause the economic diminution of the whole country. Top executives of banks and their bonus payment Usually, banks pay high salaries to their top executives with intent to retain them in the organization since they are the skippers who lead the day to day activities. I am of the opinion that top executives of the banks that received bailout money should not be allowed to collect large bonuses. As the top executives are the decision takers of the organization regarding various matters, they are also responsible for the results obtained from the business. However, bank’s top executives are paid usual rates regardless the output of the business since the management concerns about their potentials. Andrew Cuomo, the New York Attorney General reports (as cited in Freifeld, 2009) that Citigroup Inc, Merrill Lynch & Co. and seven other US banks have paid $32.6 billion as bonuses to their executives even though they were driven to receive $175 billion in tax payer funds. Similarly, there are a large number of other cases which show the trend of giving high bonus amount to top executives out of bailout money. The top executives assume that they are entitled to get a fixed amount of bonus as a percentage of salary whether the company has performed well or not. From the Deontological point of view, the bonus payment rules do not change with changing business situations so that the top executives have the right to be paid high bonuses irrespective of the profit graph of the company. In contrast, Utilitarian view would suggest that the pain and pleasure of all actions are determined on the basis of total happiness derived from those actions (Vesilind, Morgan & Heine, 2009, p.69). Hence, the top executives of the banks must be paid well when the company performs well, and their payment must be curtailed as the company faces depression. As Freifeld (2009) comments, in usual practices, bankers pay money ranging from $80,000 to $60,000 depending on the seniority and performance of their executives rather than bank’s performance This argument is strongly supported by the AP Review as it says banks’ top executives earn an average of $2.6 million in ‘salary, bonuses and benefits’ (The Washington Times). Majority banks fear about the resignation of their top executives if they are paid in accordance with business fluctuations. In my opinion, banks must give priority to their business survival rather than their top executives’ retention. The huge bonus payment to top executives in times of crises would cause many ethical issues within the organization as it drives other employees to oppose management strategies. If the top executives are paid huge bonuses irrespective of their weaker performance, they would not take maximum efforts to run the organization more efficiently. Freifeld also points out the Cuomo report which suggests that employees must share the upside when the bank’s overall performance is strong and they must adjust with the down side when the bank weakly performs. Bailout money is the last resort for banks with which they can try to survive; hence it should not be utilized to treat the top executives. It is advisable to provide bonuses as a percentage of bank’s profit since it facilitates financial flexibility to banks. Melissa Murray, a spokeswoman for Wells Fargo (as cited in Freifeld, 2009) suggests that it is good to adopt “pay-for-performance” culture where executives are treated on the basis of their performance. This plan will motivate the top executives largely as it enables them to acquire unlimited income based on their performance. The Federal Reserve can take some effective steps regarding the top executives’ bonus payment policies, and it would prevent the failure of the banks to a large extent. The top executives must also understand the fact that their existence is based on company’s future so that they should adjust with changing financial environment. Conclusion The act of providing large bonuses during the times of bailout is an unfair practice that can adversely affect the sustainability of a bank. Although, the top executives are the inevitable cells of the business body, their bonus payment has to be regulated for the effective functioning of the whole system. Since top executives play a vital role in determining the success and failure of a business, they should have the moral obligation to share the downfall of the business. To be more specific, performance based bonus payment is the best method that would aid banks to take maximum advantage of their employees’ potential. Reference “Despite bailout, bank chiefs received bonuses”.(Dec 22, 2008). The Washington Times. Retrieved from http://www.washingtontimes.com/news/2008/dec/22/despite-bailout-bank-chiefs-received-bonuses/ Freifeld, K. (2009). Banks Paid $32.6 Billion in Bonuses Amid U.S. Bailout (Update4). Bloomberg. Retrieved from http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aHURVoSUqpho McKay, C. (2010). Smart Real Estate Deals in the Bank Bailout Era and Beyond. Bloomington, USA: AuthorHouse. Vesilind, P. A, Morgan, S. M & Heine, L. G. (2009). Introduction to Environmental Engineering. USA: Cengage Learning. Read More