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Can Wall Street bonuses and pay be defended?

Wall Street bonuses are shelled out at the end of every year which gets the public’s feathers ruffled nearly every year, but one program explains why although bankers get paid too much, the structure can be defended.

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Wall street bonuses and pay structure

As the American economic crash is blamed on Wall Street and it has become popular to bash the one percent, many speculate that cutting the massive annual bonuses or altering the pay structure of the fat cats on Wall Street would go a long way toward fixing the economy, but One Minute MBA offers an alternative view.

Some of the points may be debatable, but analyzing Wall Street bonuses from a bird’s eye view has some, including One Minute MBA considering whether or not slashing bonuses has any benefit outside of catharsis.

Read also: Estimize – first open platform for financial estimates

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“In Defense of Wall Street Bonuses” video transcript:

Now is the time of year when Wall Street banks pay their employees and executives their annual year-end bonuses and the rest of America freaks out about how outrageously big they are.

I’ve covered several bonus cycles now and I’ve come to realize that no amount of justification or hand-wringing on the part of executives can put an average Wall Street bonus within the realm of normal-person acceptability. And I agree that Wall Street workers are, by and large, overpaid.

But I’ve also come around to the idea that if you have to overpay Wall Street workers, year-end bonuses might be a good mechanism for doing it. Big bonuses smooth out the cyclical ups and downs of banks and stabilize local labor markets, and they may even help the greater economy.

Let me explain what I mean.

In most jobs, a cash bonus is a perk. You might get one if you bring in a lot of new business or if your company does exceptionally well that year. (Say, if you work at a book publisher whose soft-fetish novels sell millions of copies.) But on Wall Street, “bonus” is really a misnomer. Year-end bonuses are built into the normal compensation process, and many are as big as, if not bigger than, base salaries. A VP at a bank might make $200,000 as a salary but get another $200,000 as a bonus (of which $100,000 might be in cash and $100,000 in deferred stock) the following January.

Paying very big bonuses and less-big salaries does two good things for banks. First, it keeps them from having to predict the future. Instead of having to budget X dollars for all employee pay in 2013, they can look back at the end of 2013, figure out where their revenue figures stand, and set their pay levels accordingly. Management loves this since it limits the risk of over- or underpaying people relative to the overall profitability of the bank. (Incidentally, individual bankers hate this because it puts a big question mark in their yearly earnings and makes planning their personal finances much more difficult.)

Second, paying big bonuses gives banks an easy way to cut a lot of costs very quickly when they need to. If they have a bad year, it’s easier for banks to eliminate variable costs than fixed costs. And in very bad years, cutting bonuses instead of salaries can mean needing to lay off fewer employees.

Banks are running out of room to cut bonuses. A widely ignored fact is that after the financial crisis, many Wall Street firms didn’t cut employees’ overall pay by much. They just shrank the cash portion of bonuses and paid more in salaries to compensate for the missing money. The bank VP who used to get 50 percent of his yearly pay in January was now getting a 75-25 split.

A JPMorgan research note from earlier this year shows this shift in action. JPMorgan’s analysts, led by Kian Abouhossein, crunched the numbers for Swiss banks (which have more of their compensation data available than American banks) and found that at one bank, Credit Suisse, fixed compensation costs (salaries and benefits) as a percentage of total “personnel expenses” rose from 66 percent to 86 percent between 2009 and 2011, while variable compensation expenses (bonuses) declined from 34 percent to 14 percent.

Making that switch — from a lot of variable pay to a lot of fixed pay — meant that banks gave up a lot of their flexibility and might (might!) have led to them laying off more employees than they otherwise would have. JPMorgan’s analysts wrote about this risk stating:

Increased regulation of employee bonus compensation has triggered increasing salaries and led to a higher proportion of deferred compensation levels, leading to a concerning highly fixed cost base for a volatile revenue business … We think going forward further adjustments in cost base might have to be driven by reduction of more senior IB staff in order to reduce the fixed cost base.

Now, maybe you think more Wall Street bankers should be laid off. That’s fine. But realize that in New York, at least, banker layoffs affect other industries as well. State Comptroller Thomas DiNapoli estimates that for every financial service job lost in New York City, two more jobs are lost in nonfinancial jobs in the city, and 1.3 jobs are lost elsewhere in the state. Taxi drivers, restaurant workers, real-estate agents — all of these people are included in that multiplier effect and are less able to get back on their feet after a job loss then laid-off Wall Streeters. (You could also argue that, psychologically, getting a big, year-end lump sum makes bankers more likely to put that money back into the economy immediately — by buying cars and houses and other expensive things — than if they got that money spread over the course of the year.)

Other than simple outrage at how much money bankers make, there are a few main objections to big Wall Street bonuses. The first is that they encourage reckless behavior by incentivizing traders to swing for the fences in an effort to juice their own pay.

But I don’t quite buy that lowering bonuses as a fraction of total pay solves this problem, since even in an all-salary system, traders would still try to boost their profits for personal gain. (They just wouldn’t see the effects until the following year’s salary hike.) In fact, theoretically, a bonus-based compensation system should actually reduce the risk of bad behavior, as bonuses — unlike salaries — can be clawed back in the event that something goes horribly wrong.

The other objection to Wall Street’s big-bonus culture is that, since banks helped wreck the economy and had to be bailed out, paying big bonuses is tantamount to rewarding failure.

Again, I generally think bankers get paid too much, and I think Ken Feinberg was right to try to cap bonuses during the bailouts, as some of what was in those bonus pools was taxpayer money. But now that TARP has been repaid, the government no longer has a say in how much banks pay their employees. So unless banks voluntarily adopt some sort of standardized, government-style pay-scale system — which they won’t — you’re not likely to see overall pay change that much relative to bank profits. More likely is that banks will pay a greater portion of bonuses in restricted stock, and less in cash, in order to kick some of their costs a few years down the road. (Morgan Stanley did this last year, when it capped cash bonuses at $125,000, but still made lots of deferred stock grants.)

This January is expected to be another horrible bonus year — “the worst bonus season since the crash of 2008,” according to the Post. That’s good if you’re opposed to big bonuses on principle and don’t care much about what replaces them. But since we know that “lower bonus” often means “higher salary,” Wall Street bashers and boosters alike should pause to consider whether lowering bonuses actually produces any benefits other than catharsis.

The American Genius is news, insights, tools, and inspiration for business owners and professionals. AG condenses information on technology, business, social media, startups, economics and more, so you don’t have to.

Business Finance

Does Apple Card discriminate against women? Maybe…

(FINANCE) Is Apple kneecapping ladies in need of credit? Here’s what their response was… AND what it should have been.

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There hasn’t been this much side-eyeing of how an Apple treats men vs women since Genesis.

Buzz from the 12 remaining bees is the shiny new credit cards devised by Apple and Goldman Sachs are offering men up to twenty times the amount of credit as women, even when a lady’s credit score is better.

And here I thought passing up the chance to call it the ‘iOwe’ was going to be the worst of it.

I don’t have to tell y’all that reminding everyone of the days before 1974’s Equal Credit Act, when us skirts, dames, broads, and the like had to have a ring on it and hubby’s permission to open a line of credit is a bad look.

Here’s where it gets worse, though.

When a few gentlemen, Apple co-founder Steve Wozniak included, launched a ‘What the dealio’ Apple’s way, the answer was: ‘Algorithms. Go fig.’ The solution implemented has been isolated credit increases for anyone who was either a big enough name to get them bad press, or complained through the help center.

‘Well, April, you fabulous creature,’ you might be saying. ‘How ever is this a problem, when a solution to subvert the issue exists?’

It’s a big enough issue that the New York Department of Financial Services is getting involved, actually! But yours truly isn’t a lawyer. Instead of breaking down any actual laws, let’s go through a few cardinal rules of business ownership to see what went wrong here from an entrepreneur perspective.

Rule 1: Thou must own thine s**t.

Now that everyone and their prepper uncles know what algorithms are (kinda), the word gets tossed around like a catch-all for tech-based blame even harder than Mercury Retrogrades. The difference here is that the planets’ movements are out of our hands.

Algorithms don’t spring forth from an application fully formed; they’re handcrafted, upgraded, and maintained by paid, human coders. And considering the two big players behind Apple Credit, and the talent they can procure, this fobbing off the blame onto ‘those wacky algorithms’ reeeeeally doesn’t cut it. And people know that. So…

Rule 2: Thou shalt remember always thine customer is smart.

Consumer savviness is on the rise, and it’s not slowing down. For some reason though, too many businesses think that Mary-Jo Mae off the turnip truck doesn’t have access to the same 5 free Medium articles a month that they do.

You can’t fob people off with ‘Eh, technology’ anymore — even at the level of first line tech support. Everyone expects an answer as well as your accountability, and if you didn’t take the steps to build your better mousetrap the first time, you need to have a press release with an apology and an actual fix in hand post-haste!

Rule 3 : Thou shalt never make the customer take extra steps to correct thine mistakes.

Scenario time!

Let’s say you’re at a nice restaurant, like dollops of house-prepared sauce on the plate instead of a cup of ranch kind of nice.

You’re having a great evening, until the waiter drops a bowl of soup on your table, and it gets EVERYWHERE. Management comes over while you’re brushing bisque out of your eyebrows and says ‘I’m SO sorry… the kitchen is down the hall to your left, go grab as many towels as you need, the buckets are in the red cabinet’

You heard that record-scratch sound effect in your head just thinking about it, didn’t you? That’s because, even when there’s an understanding that a solution is fairly simple, when it’s not your eff-up, you expect the people at fault to fix it.

Any institution that can give you a credit approval in seconds has enough power to update unfair decisions in real time. But prompting them to do so shouldn’t be the customer’s duty.

Remember how irritated we all were when Equifax leaked our data? Then, instead of mailing us all a check (which they could), we all had to rely on news outlets to tell us where to go to claim our piece of the settlement (I’ll take my $1.25 where I can get it), and then had to do so again with the implication that we might have been lying if we chose the money over the free credit monitoring the first time? I remember.

What’s going on now has one major difference from the hypothetical and the real-world happening I just presented though. Apple Credit did not have these people’s money yet.

And if anyone offended by this were to pull an En Vogue, they’re “never gonna get it!”

Sometimes launches don’t go perfectly. There are times when campaigns, or software, or hard tech have issues that give off the appearance of systemic malice, even if there’s none behind it. But the fact remains that when there’s a problem, top execs need to come out and speak against it before anyone can start attributing a mistake to intentional discrimination.

Keep your head, beta test everything with as wide and diverse a pool of users as you possibly can, let your firstline staff approach you with trends they’ve noticed, and remain open to telling consumers you made a whoopsie, so you won’t have to scramble later in the game!

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Business Finance

Millennial women share about how they spend (and save) money

(ENTREPRENEUR) A group of millennial women were surveyed about how they save their money. These are their stories…

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This year, I turned 24, and while I know this isn’t old, I never thought I’d be this old. With this in mind, I’ve been asking all of my friends and family members the same question: “If you could give any piece of advice to your 24 year-old self, what would it be?”

While I’ve been getting varied and interesting pieces of advice, the one I need to focus on more is working on saving more money. This can be tricky, especially when you first start making money, so it helps to hear how others do this.

Recently, Bustle surveyed over 1,000 millennial women, in their 20s and 30s, and they shared how they save money. Their incomes ranged anywhere from $30k to $150k. Included below are some of the individual responses that include innovative ideas that anyone at any age could potentially implement.

1. Samantha, 30: Uses a budget for her finances. Rather than enjoying instant gratification, Samantha makes a wish list of things and experiences she wants to save money for. Then if she accomplishes a goal, she treats herself to something on the list.

2. Ronnika, 33: Instead of continuing a habit of meeting friends for drinks every week, Ronnika has found it is more fiscally responsible to invite friends over. Also, She takes any extra money from her paychecks and puts it in a checking account that is not locally accessible.

3. Michelle, 24: To save on entertainment, Michelle has opted for only using WiFi rather than getting cable. Additionally, she keeps her thermostat set at 62-64 degrees and uses layers and space heaters to save on costs. She also encourages packing a lunch everyday, as that is a big saver.

4. Kelly, 24: Kelly attributes her money saving to living with her parents. She also suggests an app called Qapital: “You can set your own rules for how you want to compile your savings — for example, I have a ‘Round-Up Rule,’ which rounds up every purchase to the nearest dollar and puts that change into savings, as well as a ‘Set and Forget Rule,’ which just automatically takes out a pre-selected amount. For me it’s $10/weekly.”

5. Libby, 24: Libby only uses her credit card for necessary expenses (such as payments for her car) and puts anything else on debit. With her credit card, she makes sure she pays off the balance in full each month so that she does not fall into debt.

6. Savannah, 25: Savannah keeps a peaceful mind savings to fall back on in case of emergencies. “I’ve found having a savings account balance equivalent to two months of my salary is a good cushion.”

7. Alexandra, 26: Alexandra keeps an Excel spreadsheet that tracks all of the money she has coming in as well as what is going out. She helps herself save by setting goals of what she wants to save and by when.

8. Lyn, 29: Lyn saves her money by looking at it as a way of paying herself first. She puts a large portion of her paycheck into her 401k and puts the maximum amount of her paycheck into her Roth IRA each year. She will then spend liberally on the things that are important to her, and harshly cut anything that she deems frivolous or won’t make her happy.

9. Marissa, 26: Marissa budgets her money and attempts the tactic of cooking for herself as much as possible. She has found that one meal out is equivalent to five meals at home.

10. Danielle, 23: Danielle saves by setting up two automatic transfers from her paycheck to budgeted savings. “So it’s like I don’t even notice the money is there. One transfer goes to ‘future me’ in the form of RRSPs or other investments, and one transfer goes to ‘fun times,’ like trips abroad.”

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Business Finance

You got an LLC and you’re ready to hire – 3 things lenders look for

(FINANCE NEWS) Yes, securing a small business loan of any kind is tedious and depends on varying lending organizations and business needs, but there is a list of general requirements small businesses should be aware of before getting knee-deep in conflicting information about lenders.

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If you are reading this, you probably have an LLC for your small business already, or money talk gets you going. If it is the former, let me say CONGRATULATIONS, and insist you pat yourself on the back in honor of your small business’s progression. Your arrival at a point where expansion is necessary is no small feat given half of small businesses fail in the first year. So, kudos to you.

Now, back to the money talk…

For LLC businesses looking to expand, please don’t fret about all of the information you’ve seen on the web. Yes, securing a small business loan of any kind is tedious and depends on varying lending organizations and business needs, but there is a list of general requirements small businesses should be aware of before getting knee-deep in conflicting information.

After some extensive research posing as the owner of imaginary businesses and annoying every loan officer who’d take my call, I’ve found three general lending requirements. I also provide a collection of the tangible information banks will likely review to meet those requirements. Take a gander:

Assets
Small businesses must have necessary assets: steady cash flow, financial reserves, personal collateral to support a variety of business fluctuations (i.e. unexpected employee loss), and a realistic pay off plan. These assets and financial safety nets are necessary for any lending organization to be confident in your business’s ability to support employee expansion in lieu of current expenses.

Proof of past
Just as you will come to expect from your soon to be employees, lenders want proof of the past and how you’ve managed past loans to align with your business goals. Historical evidence will further determine if your expansion is feasible, but also if it is worthy for the company to accept the lending risk.

Specific plans
Finally, be prepared to provide your small business’s explicit expansion plan, including how you arrived at your suggested loan amount and how you intend to divvy out the funds. It is important that you are as specific as possible in your projected numbers, seeing as one employee could make a $60,000 difference, and largely affect your expansion plan and financial need.

Before you go…

Now that you’re equipped with the magic three, you’re probably feeling empowered to walk into your nearest bank and demand your small business loan. Let’s first be sure you have all of the necessary information on-hand and ready to produce.

Lending companies that look for the magic three before investing arrive at their conclusion after collecting data from the following pertinent information:

– Proof of collateral
– Business plan and expansion plan
– Financial details
– Current and past loan info
– Debts incurred
– Bank statements
– Tax ID
– Contact info
– Accounts receivable information
– Aging
– Sales and payment history
– Accounts payable information
– Credit references
– Financial statements
– Balance sheet
– Profit and loss history
– Copies of past tax returns
– Social Security Numbers
– Assets and liabilities details

Now, my friend, do I release you as proud as a parent unto your nearest bank to secure your small business loan and begin growing your staff the way you’ve dreamed. I’m confident you will find the aforementioned information helpful in said quest, and would like to wish one last time (because it’s impossible to over-congratulate) a sincere CONGRATULATIONS on your businesses growth.

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