The reality is that for much of its existence, finance was a service industry whose purpose was to provide assistance to what were then perceived to be the true economic engines of industry and commerce. Pay was good, but not the stuff of headlines and protest movements.
That began to change in the 80s with deregulation. So the era of pay-as-an-indicator-of-your-self-worth has been with us for approximately one generation. This corresponded, not coincidentally, after a slight delay with the decline in average US household incomes and the perception of US and European economic retreat. You can look it up.
The question now for business and policy makers is whether a decline in financial services compensation will prove to be a leading indicator that signals a renewal of economic growth. That would certainly be something to contemplate. JL
James Stewart comments in the New York Times:
The day of reckoning may be at hand.
This week, the venerable investment bank Morgan Stanley stunned a generation of Wall Street bankers and traders by announcing that it was capping cash bonuses for 2011 at $125,000. Its top executives, including the chief executive, James P. Gorman, and his management team, will receive zero cash.
And the Republican presidential front-runner, Mitt Romney, reignited a national debate over taxing the rich and Wall Street pay by revealing that his tax rate was in the 15 percent range, joining the billionaire investor Warren E. Buffett among the ranks of the favored few who pay lower rates than people earning just a small fraction of their millions. Mr. Romney hasn’t revealed his tax returns or total income, but disclosure forms indicate he received $9.6 million in 2010 and part of 2011 and had a net worth in excess of $250 million, much of it derived from his days as head of the private equity firm Bain Capital.
For most people, $125,000 is a lot of money, and for people on Wall Street, the cash bonus comes on top of base pay that has increased in recent years. The average base pay for managing directors at Morgan Stanley has risen to $400,000 and to $600,000 at Goldman Sachs. Employees also earn large parts of their bonuses in deferred cash and stock.
But $125,000 is a pittance by Wall Street standards. Citigroup paid Andrew Hall, a star commodities trader, a bonus of $98 million in 2008, the year of the financial crisis. As recently as 2010, many traders and investment bankers were arguing over whether their yearly bonuses should be eight figures rather than seven. Compensation at the 25 largest firms hit a record $135 billion that year, according to an analysis by The Wall Street Journal.
This week, Wall Street veterans were marveling that after paying federal and New York’s high state and city income taxes, Morgan Stanley employees who get the maximum cash bonus would take home just $65,000 to $75,000 on top of their base pay. “That’s an eye-opener,” said Michael Driscoll, a former top trader at Bear Stearns and Geosphere Capital, a hedge fund, who is now a visiting professor at Adelphi University. Many people on Wall Street, he said, have “multiple homes at high cost and with big mortgages, private school payments, college tuitions, car leases and payments. They were out over their skis with leverage and assumed the good days would last forever.”
Last year, Morgan Stanley increased the deferred portion of cash compensation to 60 percent from 40 percent, a move that was greeted with howls from employees who said they didn’t have enough advance notice and needed the money to meet mortgage payments, school costs and other fixed expenses. “The cost of living is so high in the New York area that we found it was a genuine hardship,” a Morgan Stanley spokeswoman told me this week. This year, cash bonuses for employees making $250,000 or less will be paid in full, with none of it deferred, although the bonuses are being capped at $125,000.
Even for those making seven figures or more, the cuts “are a blow,” Mr. Driscoll said. “The effect is psychological. To a large extent, Wall Street keeps score by what you’re paid. If you’re making $750,000 or $1 million, you’re doing O.K. by any reasonable standard. A lot of people make that kind of money. But it affects people’s psyches. It’s a hard thing for the other 99 percent to grasp, but for better or worse, that’s how they measure their value and self-worth: what their paycheck is. I’m not trying to defend that, but that’s how it is. Now they’re being paid less and less. They’re being pilloried in the press and by the 99 percent. Even Republican candidates are attacking you. People in the industry are being treated like pariahs.”
An investment banker I know lamented, “Contrary to popular opinion, bankers are people, enduring the human condition like other people. The industry is experiencing massive retrenchment, waves of redundancies, endless public criticism and repeated cutbacks in compensation levels.”
Overall compensation on Wall Street this year is expected to drop at least 30 percent, reflecting the dismal financial results reported this week by the industry standard-bearers Goldman Sachs, JPMorgan Chase, Bank of America and Morgan Stanley. The compensation ratios are hard to evaluate because this year’s payouts include the deferred portions of previous years’ awards, and include only the current components of this year’s.
Still, a trend seems clear. At Goldman Sachs, compensation was just over 42 percent of revenue, and at JPMorgan Chase it was 34 percent for the investment bank — low by historical standards. Even with the new caps on cash bonuses, Morgan Stanley’s compensation was something of an outlier, representing 51 percent of revenue, which reflects high costs at its global wealth management division, where brokers are paid on commission. Still, Morgan Stanley’s ratio was sharply lower than 2009’s 62 percent, which Mr. Gorman at the time vowed “no one will ever see again.”
In a regulatory filing Friday, Morgan Stanley said Mr. Gorman’s total compensation for 2011, including stock and deferred cash, would drop by 25 percent, to $10.5 million from $14 million in 2010.
Wall Street firms typically aim for a compensation ratio of less than 50 percent of revenue, but especially in weak years, they’ve often gone higher. One of the maddening aspects of Wall Street pay, at least for those outside the industry, is that in good times bankers and traders have demanded what they consider their fair share, often invoking the adage “we eat what we kill.” But in lean years, they’ve also insisted on high pay, threatening to jump to a competitor. What is different this year is that firms seem willing to call that bluff.
“In prior years, you’d see the ratios jump in down years,” said Brian Foley, an executive compensation expert. “You aren’t going to see that this year. The retention argument was always there, but it’s tough to make that argument this year because much of the Street is down. Where are they going to go? People are cutting back or even eliminating investment banking. They’re laying people off. A hedge fund? There are only so many hedge funds. And hedge funds haven’t had such a good year, either. Plus, the job security there is weak. It’s a limited opportunity, and now it’s constrained. Private equity is also limited. Those doors are closing.”
And European banks like Deutsche Bank and UBS, which once aggressively poached Wall Street talent, are reeling from the European debt crisis and have all but stopped hiring. UBS announced that it was sharply curtailing its investment banking operations after years of expansion. One Wall Street executive told me that “frankly, what’s different from last year is that the playing field feels even. Last year, they could walk across the street to Deutsche Bank, and we had some defections. This year, there’s very little risk. A top trader isn’t going to walk out the door.”
And a person with knowledge of Mr. Gorman’s decision at Morgan Stanley said he “wants people to think long term.”
Another factor has been the Federal Reserve, which has been closely scrutinizing Wall Street compensation practices in an effort to align incentives with longer-term interests and to curb incentives for excessive risk-taking. “We’re very aware of the environment we’re operating in,” the Morgan Stanley spokeswoman said. “We’re taking a disciplined approach to compensation and trying to align it with shareholder interests. And the bottom line is, it wasn’t a good year.”
Such changes are arguably long overdue. Many people are still enraged by the perverse compensation practices that had the insurance giant American International Group using money from the Troubled Asset Relief Program to pay millions in guaranteed bonuses to employees after investments drove the firm to insolvency. “I know no one is going to shed any tears over these people,” Mr. Driscoll said. “But I know people who are having a tough time keeping it all together. You can manage for a year or so, but eventually the compensation levels we’re seeing are going to catch up with you.”
It remains to be seen whether Wall Street’s newfound pay discipline will stick. A culture in which self-worth is measured by pay isn’t going to change overnight, or even in a few years. But virtually everyone I spoke to agreed that Wall Street pay, while still lofty, will be lower for the foreseeable future, and may never return to the heady days of 2007. “Internally, it’s troubling for people,” one executive told me. “But they’re going to have to change the way they think. In the mid-1990s, everyone did fine, the pay was perfectly respectable, and it didn’t make headlines. The chief executive made $4 million, and you thought that was great. Was anything so wrong with that?”
0 comments:
Post a Comment