Newspaper article International Herald Tribune

Wall Street Pay Cuts? It's Complicated

Newspaper article International Herald Tribune

Wall Street Pay Cuts? It's Complicated

Article excerpt

Investment banking bonuses are expected to be the lowest they have been since 2008 amid lackluster profits, but the compensation- to-revenue ratio seems to be rising.

Is Wall Street cutting bonuses enough?

That is a question worth considering amid chatter that investment banking bonuses are expected to be the lowest they have been since 2008 amid lackluster profits.

Few people outside the industry are shedding tears. The average Goldman Sachs employee was paid $292,397 in the first nine months of 2011, down about 21 percent from the period in 2010, when the average payout was $370,056. That is of course, an average, and includes the salaries of those on the lower scales, like support staff.

Each Goldman partner is still expected to take home at least $3 million; in previous years, payouts twice that amount were considered common for the top echelon.

While the total compensation reported by big banks in their 2011 results may be lower, keep an eye on another, and perhaps more important, yardstick that is likely to increase at some firms: the compensation-to-revenue ratio.

At Goldman Sachs, for example, compensation as a percentage of firm revenue is expected to rise to 44 percent in 2011 from 39.3 percent in 2010, according to Mike Mayo, a banking analyst with the brokerage firm CLSA. The firm's revenue is expected to drop about 22 percent, and its profit is expected to fall 7.2 percent. Its shares have fallen 45 percent in the past year.

At firms like Morgan Stanley, where share prices tumbled 43 percent in the past year and pretax charges worth $1.8 billion are expected to be booked for the fourth quarter, the compensation-to- revenue ratio is also expected to jump higher. In its 2010 financial year, its investment bank paid out 50.7 percent of revenue in compensation.

It is an odd Wall Street paradox: In down years, a higher percentage of a firm's revenue is paid to employees.

"In the tug of war between employees and shareholders, the employees are winning," Mr. Mayo said. He pointed out that it was still often employees in the upper ranks, including those in the chief executive suites, who took home the largest share of the compensation. "Wall Street has its own 99 percent and 1 percent," he said. "The 1 percent continues to win against the 99 percent."

He continued: "Is the incentive pay an incentive, or is it an entitlement?"

For the past several years, while recovering from the crisis, the biggest investment banks have tried to reduce the percentage of revenue they have paid employees, bowing to investors and regulators. Until just recently at Goldman Sachs, for example, about half of revenue was used to pay employees.

"You used to be able to set your watch by that 50 percent," said Glenn Schorr, a banking analyst with Nomura Securities. Now, however, the compensation ratio is expected to rebound somewhat. "It's a tough balancing act, especially as revenues are down," he said. …

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