(Bloomberg Opinion) -- Bonus season has arrived, when bankers and traders take home a significant portion of their annual compensation in a single lump-sum payment. It’s Christmas on steroids — or so it can seem to workers outside of finance, most of whom have to make do with a fruit basket or other conventional gifts.
The story of how Wall Street entangled the ritual of gift-giving with the business of compensation has origins in the distant past. Well over a century ago, a legendary banker apparently concluded that the holiday spirit could be put toward very practical, pecuniary ends.
In the 19th-century U.S., many businesses rewarded employees with modest Christmas presents: a holiday turkey for ordinary laborers, a gold coin for clerks and other white-collar workers. These tokens of appreciation meant something to workers. But they weren’t a form of compensation.
Occasionally these gifts served more practical ends. Retailers dangled the prospect of Christmas bonuses to get employees to work hard during the frenzied holiday season, for example. The Woolworth family, founders of the eponymous chain of five-and-dime stores, began distributing Christmas bonuses in the 1890s to shop-floor clerks at the rate of $5 for every year of service, with a maximum of $25 per employee. But the Woolworths had an ulterior motive: They wanted to limit employee turnover during the critical holiday season, as well as avoid strikes.
These bonuses had much in common with a larger movement in the industrial world that proposed sharing profits with employees. The motive was not altruistic but pragmatic. In an age when the conflict between labor and capital often turned violent, firms hoped that giving workers a small stake in the business would lessen the appeal of strikes and unions. Distribution of the profits typically took place at the end of the year, just in time for the holiday season.
These proposals rarely worked. They weren’t popular among many factory owners because they cost money. And most unions hated them because they undercut attempts to organize.
It fell to a very different kind of business to make profit-sharing a reality: the world of high finance. And it was the most powerful, influential financier of the era who first put the idea into practice, grafting it onto the hoary tradition of giving Christmas gifts to employees.
At the dawn of the 20th century, J. Pierpont Morgan presided over a vast investment banking empire. In 1901, he orchestrated a series of mergers, including the ones that led to the creation of U.S. Steel, then the biggest company in the U.S. And when Christmas rolled around, Morgan played Santa Claus.
“There is no one more generous,” reported one newspaper, “than the financial magnate when the market goes his way.” Rather than distributing turkeys, Morgan gave every employee at his namesake firm a one-time cash gift equivalent to an entire year’s salary. A handful of another financial firms followed suit. The managers of these other firms all had close connections to J.P. Morgan himself: George Baker at First National Bank, forerunner of today’s Citibank, did the same as Morgan, as did Drexel and Co. of Philadelphia, which Collier’s described as a “collateral branch of the house of Morgan.”
Morgan clearly coordinated these gifts. The question is why. Morgan said nothing in public about the practice, but it seems likely that the move was a self-conscious effort to strengthen the social ties and loyalty that would prove essential to the firm’s success.
As a general partnership, each stakeholder in the firm was on the hook for any losses or the malfeasance of any single member. Morgan likely hoped to bind employees to the fate of the firm, building an esprit de corps that would nudge his underlings to think of the firm first rather than their own interests. He repurposed the Christmas bonus to do so.
Some hint of this comes from the manner that Morgan distributed these first gifts. Older firms had given employees a single gold coin to commemorate the holiday. In 1902, by contrast, Morgan had seven kegs of newly minted coins delivered to his office so that he could bestow the massive bonuses using piles of gold. (This wasn’t entirely realistic for higher-paid clerks, who received $5,000 gold certificates in lieu of the real thing.)
The practice soon spread to Wall Street firms outside of Morgan’s orbit, although the size of the gifts varied with the normal ebb and flow of annual profits. Eventually many firms held off on distributing bonuses until they had balanced the books for the year. This meant holding off until New Year’s Day.
Some firms took very different approaches to handling year-end bonuses. Morgan pegged each person’s bonus to their existing salary. Other firms, fewer in number, opted for redistribution. The New York Times reported that some of the bigger banks had settled on a fixed sum that everyone, no matter their rank, would receive.
But this did not become a widespread practice. Most firms sought to use Christmas bonuses to reward some employees more than others. Some privileged loyalty: The longer someone remained with a firm, the bigger the bonus. In some cases, the employee’s rank determined the size of the gift.
In yet others, employees deemed more deserving for some reason might receive the biggest payouts. These disbursements, though, often depended on subjective considerations: everything from an employee’s performance to the fact that they had made plans to marry. People overlooked during the holidays often complained, and soon the whole practice became increasingly rationalized.
By 1920, the Times could note: “The bonus custom has been so systematized as to become almost a regular part of the compensation paid to employees. The bonus has been graduated from the ‘charity’ class into that of regular payment. … It has been worked out scientifically and the institutions which have brought it to the greatest state of efficient development regard it as a valuable factor in welding together the institutions and their staffs.”
By the end of 1928, Wall Street was paying out an estimated $100 million in bonuses to its employees, or approximately $1.5 billion in today’s dollars. That was the biggest year for bonuses in Wall Street’s history up until that time.
At the time, some management theorists expressed unease with the scattershot approach to this largesse. In 1929, one prominent management guru, Harry Arthur Hopf, described Wall Street’s practice of pegging bonuses to salary without regard to performance as a waste. Such firms, he declared, “might just as well throw the money away.”
The Great Depression, though, quickly put an end to this debate: There were no bonuses. It would be many years before they would return to anything approximating the levels seen at the height of the Roaring Twenties. And when they did, Wall Street was a different place: more regulated, more institutionalized, less profitable. Some bankers talked about eliminating them altogether.
In 1977, Sanford Weil, then chairman of Shearson, declared: “We didn’t want our employees’ earnings to depend on whether the company has a good year. We wanted to reach a point of stability in salaries, not volatility.” Shearson and other banks got rid of bonuses entirely for lower-level staff, retaining performance-based bonuses only for the higher-ups.
But old habits die hard. When the stock market started booming again in the 1980s, the holiday bonus once again played a starring role in employee compensation, fattening the take-home pay of ordinary employees and high-flying traders alike. John Whitehead, head of Goldman Sachs at the time, explained the revival of the old system: “We think bonuses are a useful tool that create teamwork.”
Despite multiple crises in the intervening years — and the demise of most of the old-fashioned partnerships — the bonus system remains alive and well in the 21st century. It’s an essential part of the compensation package of many on Wall Street. It may not come in the form of a bag of gold coins, and the amount may not have much at all to do with the holiday season. But the bonus has become a tradition in its own right, as timeworn and predictable as a Christmas turkey.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Stephen Mihm, an associate professor of history at the University of Georgia, is a contributor to Bloomberg Opinion.
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