$100 Million Bonuses Should Not Exist

My headline refers to the $100 million bonus that Andrew Hall, the head of Citigroup’s Phibro commodities trading group, is reputedly due this year. This bonus is in addition to the $100 million he was paid last year. Mr. Hall has a profit sharing formula to determine his pay, and his group is very profitable; hence the huge paydays.

When I say that such a large bonus should not exist, I am not referring to the controversy of whether a bank that has received so much taxpayer aid should honor Hall’s contract and pay such a large bonus (although they probably shouldn’t) or whether it is in any way appropriate for a society that pays teachers and firemen $50,000 per year to pay a guy $100 million to speculate in oil futures (duh: it isn’t appropriate, and in fact is obscene).

No, I say that such a bonus shouldn’t exist because economic theory says it shouldn’t. Under classic microeconomics [as I learned in Professor Bresnahan’s Firms and Markets class), if a firm is making outsized profits, other firms will see those profits and enter the market. The competition will reduce returns until profitability is in line with the industry.

If Phibro is repeatedly paying Hall $100 million per year, it’s safe to say that their profits are awesome, and thus outsized. There certainly isn’t a lack of traders and capital on Wall Street, all chasing returns. Hedge funds alone have $1.4 trillion in capital. So why isn’t the competition battering Phibro? I don’t know the answer, but here are a few possibilities:

  1. There is some sort of barrier to entry. It’s not capital, because plenty of people have that, but maybe there is a regulatory hurdle. Perhaps the few entrants in oil trading have figured out a way to maintain an oligopoly and thereby restrain competition.
  2. Maybe everyone in the oil trading business is insanely profitable, but only Hall has the sort of contract that pays him such a huge sum. It could be so easy that if I started swapping a few oil futures, I too could make millions.
  3. Or, it could just be that Hall and the folks at Phibro are really that much better than anyone else in the industry.

Again, I don’t why, but I do know that the only way a person should be able to consistently make that much money is if they are an absolute superstar or if they have figured out a way to restrain trade, which is usually illegal. Given the ways of Wall Street, if I had to pick one of those answers, I’d guess the slimy one.

Advertisements

One response to “$100 Million Bonuses Should Not Exist

  1. zeusiswatching

    As a shareholder I don’t mind paying out huge sums of money to incredible employees, but what would $100 million in the bank, or reinvested into my company do for long term equity? Is this really good for the bottom line on my retirement account? I doubt it.

    If that $100 million goes into one employee’s pocket, it isn’t going into R&D, it isn’t going into safer savings instruments to collect some interest. That money is gone so it isn’t available to cover sundry expenses so the company I own might end up having to borrow that money and pay interest for a loan that would never have been needed?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s