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(BN) Wall Street May Reduce Compensation Costs to Avoid
From: Dave Farber <dfarber () me com>
Date: Fri, 15 Jan 2010 11:18:43 -0500
From: "CONNIE GUGLIELMO, BLOOMBERG/ NEWSROOM:" <cguglielmo1 () bloomberg net>
To: <dave () farber net>
Date: January 15, 2010 11:12:46 AM EST
Subject: (BN) Wall Street May Reduce Compensation Costs to Avoid
fyi
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Wall Street May Reduce Compensation Costs to Avoid More Outcry
2010-01-15 01:26:41.34 GMT
By Michael J. Moore
Jan. 15 (Bloomberg) -- Wall Street firms, facing pressure
from lawmakers and shareholders to rein in pay, may report
smaller bonus pools because of lower fourth-quarter revenue and
mounting public outrage, analysts say.
Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase
& Co.’s investment bank may hand out $27.6 billion in bonuses,
according to analysts’ estimates. While that’s 49 percent higher
than a year ago and more than the previous high of $26.8 billion
in 2007, it’s less than some analysts expected in October.
Banks have announced plans to pay more in stock and defer
cash payments to satisfy regulators’ calls to tie pay to long-
term performance. They may still face public anger over the size
of bonus pools after the Troubled Asset Relief Program injected
capital into the major financial institutions during the crisis.
President Barack Obama yesterday called bank bonuses “obscene”
as he proposed a levy on as many as 50 large financial firms to
recoup all the U.S. bailout money.
“They know that everyone is looking at this stuff with a
microscope, and I think they know what the reaction is going to
be,” said David Schmidt, a senior consultant at James F. Reda &
Associates LLC, a New York-based compensation firm. “The public
perception is still going to be that it’s a lot of money.”
Analysts expect JPMorgan, the second-largest U.S. bank by
assets, to post a 13 percent decline in net revenue from a
record $30.1 billion in the third quarter. Goldman Sachs’s
revenue may drop 21 percent, and Morgan Stanley’s may fall 8
percent, according to analysts’ estimates.
Goldman Sachs Compensation
The fall in compensation costs is expected to outpace the
revenue decline at Goldman Sachs, which may pay the most of the
three firms. Goldman Sachs, the most profitable securities firm
in Wall Street history, probably cut compensation to 25 percent
of revenue in the fourth quarter, after setting aside $16.7
billion, or 47 percent, through the first nine months, Credit
Suisse Group AG analyst Howard Chen wrote in a note on Jan. 4.
That would bring full-year compensation to 43 percent of
revenue, the lowest proportion since Goldman Sachs went public
in 1999, Chen wrote.
Lloyd Blankfein, 55, and Jamie Dimon, 53, the chief
executive officers of Goldman Sachs and JPMorgan, and John Mack,
65, chairman of Morgan Stanley, defended their firms’ pay
practices in a Jan. 13 hearing of the Financial Crisis Inquiry
Commission. They said making senior executives hold shares they
receive as compensation aligns their interests with
shareholders.
“If you’d look at the history of our compensation, the
compensation always correlated with the results of the firm, as
it did last year,” said Blankfein, who said he is required to
hold 90 percent of his shares until retirement.
Morgan Stanley Bonuses
Morgan Stanley, the second-largest securities firm before
becoming a bank last year, plans to defer at least 65 percent of
year-end bonuses for its top 30 executives, a person familiar
with the matter said last month. One-fifth of the deferred
amount will be tied to Morgan Stanley’s performance, the person
said.
Goldman Sachs said last month that its top 30 executives
will get year-end bonuses in stock that they can’t sell for five
years. The stock vests over three years and can be repossessed
if the firm determines that the executive failed to adequately
analyze or raise concern about risks.
JPMorgan said in a Dec. 14 statement that it gives a
“significant share” of bonuses in stock, and that compensation
is based on multi-year performance periods. Senior executives
must hold 75 percent of all equity awards they are granted, the
firm said.
Income Statement ‘Challenge’
Payment of bonuses in stock as opposed to cash lowers the
expense firms have to record on their income statements because
the cost often isn’t realized until the shares vest. That may
boost earnings in the quarter and allow firms to avoid topping
their previous record compensation amounts.
“The move to stock is going to give them a lower number in
that compensation and benefits line,” Schmidt said.
“Interpreting the income statement is going to be more of a
challenge now.”
Goldman Sachs and Morgan Stanley’s new pay plans, which
include more stock and longer vesting periods for many
employees, reduce compensation expense for a new managing
director by 10 percent to 15 percent, Brad Hintz, a Sanford C.
Bernstein & Co. analyst, wrote in a Dec. 15 research note.
“While the immediate financial impact is positive, the
organizational impact on some sectors of the business could be
significant,” Hintz wrote. “Bankers may find working for a
financial boutique more attractive on a risk-adjusted basis than
staying with a large bank facing regulatory uncertainty, Capitol
Hill intrigue and compensation ‘clawbacks.’”
Full-Year Compensation
Goldman Sachs is facing lawsuits from a pension fund and
an individual investor over its bonus plans.
Kristin Lemkau, a JPMorgan spokeswoman, declined to
comment. Morgan Stanley spokesman Mark Lake and Lucas van Praag,
a spokesman for Goldman Sachs, didn’t return calls for comment.
Securities firms typically use slightly less than half of
their revenue to pay salaries, benefits and bonuses, a
percentage that is adjusted throughout the year. In the first
nine months, Goldman Sachs, Morgan Stanley, and JPMorgan’s
investment bank told shareholders that they planned $36.4
billion for compensation, up 27 percent from the same period a
year earlier.
The three New York-based firms may set aside $46.1 billion
for full-year compensation, according to estimates from five
analysts, including Macquarie Group’s David Trone, Bank of
America Corp.’s Guy Moszkowski and Sandler O’Neill’s Jeff Harte.
That’s up from $30.9 billion in 2008 and $44.7 billion in
2007. Year-end bonuses usually account for about 60 percent of
compensation, New York-based pay consultant Options Group said
in a report.
Bank of America in Charlotte, North Carolina, and New York-
based Citigroup Inc. don’t break out compensation data for their
investment-banking units. Bank of America plans to cut the cash
component of investment bankers’ bonuses to about 15 percent,
four people familiar with matter said this week.
For Related News and Information:
On finance and pay: TNI FIN PAY <GO>
On the credit crisis: NI CRUNCH BN <GO>
Most-read stories on the U.S. Treasury: TNI MOSTREAD TRE <GO>
Credit crunch page: WWCC <GO>
Government relief programs: GGRP <GO>
Winners, Losers in TARP: BTCPP <Index> MRR4 <GO>
Top finance stories: FTOP <GO>
Writedowns and credit losses v. capital raised: WDCI <GO>
TARP capital injections: WDCI BAILOUTS <GO>
Goldman Sachs balance sheet: GS US <Equity> FA BSBAR <GO>
Morgan Stanley’s historical beta: MS US <Equity> BETA <GO>
JPMorgan fundamentals: JPM US <Equity> GF <GO>
--With assistance from Christine Harper in New York. Editors:
William Ahearn, Alec McCabe
To contact the reporter on this story:
Michael J. Moore in New York at +1-212-617-6919 or
mmoore55 () bloomberg net.
To contact the editor responsible for this story:
Alec McCabe at +1-212-617-4175 or amccabe () bloomberg net
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