What’s wrong with Wall Street bonuses? Arguably very little.

Are you like President Obama and his finance advisors, who again [still?] are hot and bothered by Wall Street bonuses?

It really ticks off a lot of ordinary people as well as a lot of the political class to learn that Wall Street people are getting paid what seems to be obscene amounts of money.  But do very many people understand how the compensation system there really works—it seems like they don’t.  As recently as last Friday, an above-the-fold Wall Street Journal headline “Goldman blinks on bonuses” by Susanne Craig makes the point—that there’s still a furor over this issue. 

Here’s what you need to know to think and speak intelligently about the subject the way things are set up now. 

First, Wall Street historically has—and continues to—operate on what amounts to a revenue sharing form of compensation.  Depending on how much the firm realizes in net revenue—that’s the amount left over after all the fixed and variable expenses have been covered—those people who help make however much there is that remains, they’re the ones who share in the profit.  The proportion of the revenue sharing, while not etched in stone, is based on historical practice, with investment bankers [Goldman Sachs and Morgan Stanley] sharing a higher percentage [in the range of 50- to 60-percent] of the net profits than do the principal financial companies [Bank of America, J.P. Morgan, Citigroup, and Well Fargo], who transfer about 25- 30-percent. 

This system amounts to a team-based, revenue sharing plan, not unlike other firms have to reward accomplishment.

While employees at any of these firms have a perfunctory amount of set pay, they really are all-year-long working for an amount of money they can make that is more or less calculated as a proportion of the total amount they and the firm can generate to begin with.  In this sense their pay is determined in the most reasonable and fair way possible:  make a lot of money for the firm, and the firm will pay you to some greater or lesser degree some reasonable proportion of that amount.  Whereas movie stars and baseball players are paid on an estimate of their expected value and anticipated performance, Wall Street workers and their managers are, for the most part, compensated on what they actually did…or, in the case of the managers and top executives, on what the people they have attracted and manage make for the firm. 

It’s not more complicated than that—you get paid relative to what team does, period. 

In one sense, Wall Street traders and their executive handlers get paid much like commission sales people or wait staff.  So why are so many people hot-and-bothered about this way of paying people for services rendered.  It’s hard to know, but to pay them another way runs the risk of removing incentives to work diligently and smartly or, worse yet, pay them based on a capricious or illogical basis of one kind or another. 

So what would happen if you slashed Wall Street pay?  You’d accomplish two things:  First, the organization would run the risk of making less money—mostly as a result of disincentivizing their workers—and, second and more importantly, you’d simply shift a greater proportion of the revenue to the owners of the business—the faceless retirement or mutual funds, or the likes of major investors like Warren Buffet.  In any case, the money “saved” from paying “bonuses” to traders and execs wouldn’t translate to cost savings, or lower prices—it simply would go to somebody else.  But that somebody else wouldn’t be near as instrumental in generating the money in the first place as are the people who are presently getting—and have historically gotten—the year-end payouts. 

You simply can’t start running the business like a plantation.

The problem is not really all that complicated—the way the system is set up today someone has to get the money, either the workers and managers, or the owners [i.e., shareholders].  In effect, what the Obama administration is saying, along with all those who find such large amounts of money being distributed as unfair, is that as owner of the Dallas Mavericks, Mark Cuban should make more and his players less…or sales agents should forgo their incentive to sell and give their commission to corporate shareholders…that waiters ought to bring the money left on the table as tips and enrich the people who are spending a quiet evening at home as the owners of the restaurant they may be working in. 

In fact, were pay to workers and managers cut out, an even worse turn of events might result.  That could lead to a loss of talent to other firms—mostly non-U.S., international firms and, in the end, a loss of performance.  This, in turn, would shift the competitive playing field in financial services away from the U.S. and further reducing this country as the center of the financial universe.  So who wants that?  Apparently President Obama and his financial advisors and a lot of other people who simply don’t understand what the alternatives are. 

Change the system if you don’t like the alternatives—but that’s what the choices are for how it’s set up now. 

[You can read more about this for yourself in a one-page article, titled “The big financial pay pie,” by Carol Loomis and Doris Burke, in the current issue of FORTUNE.] 

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