Monday, March 23, 2009

One person's perspective on bonuses

When I followed my wife from Madison to Washington in 2002, I thought it would be a great opportunity to try something different from academia. While I enjoyed being a professor very much, it struck me that I could learn more from doing something else for awhile. I hence wound up at Freddie Mac--where in about 16 months I learned more about mortgages and human nature than I ever thought possible.

Money was actually not much of a motivation for the move. My salary at Freddie was slightly higher than my nine-month salary at Wisconsin's School of Business. But at Wisconsin I could get two-months of summer research support (or 22 percent), whereas at Freddie I might get a bonus (typically 15 percent). So in the end, total compensation in the two places was pretty much even--although Freddie's cafeteria was much better.

That said, I can't say that I ever counted on getting the bonus. Indeed, I figured that if the company did badly, there would be no bonus. As it happens, during the one full year I was at Freddie, 2003, the company did very badly indeed, not financially, but ethically. In the wake of an earnings smoothing scandal, most senior management was fired. I suppose this wasn't the fault of we worker bees, but it occurred to me that I should have seen it coming. Before I joined Freddie, I asked a Senior Vice President how Freddie could continue to make good on its promise of double digit earnings growth, given that the mortgage market was finite and that Fannie and Freddie together good gain no more than 100 percent of the conventional conforming market. Has answer was, "that is a good question."

I asked a good question, but I was too naive to consider the implications of a reasonable answer. So while I wasn't responsible for the company's troubles, I should have known enough to avoid the company, and having gotten myself into it, I shouldn't have been surprised if there were no bonuses.

It turned out we did get bonuses. The amount was not the full 15--I don't remember anymore exactly what it was--but it was substantial. I have to admit this mystified me until it dawned on me--workers tend to think of bonuses as an entitlement, rather than, well, a bonus.

1 comment:

Doug Willis said...

The companies I worked at based bonus compensation on two things: 1) company performance including sales and prfitability and 2) individual performance usually based on meeting a sales quota.

I don't understand how companies are paying Bonus dollars when they are in such poor shape financially. Lets accept the fact and admit to what it truly is..annual compensation. It's just referred to as Bonus, since employee benefits (insurace, retirement and possibly 401K contributions may be exempt from "bonus" compensation.