Wall Street Firms Cut Compensation, ‘Buckling’ to Washington

By Michael J. Moore
Jan. 25 (Bloomberg) -- Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co.’s investment bank slashed their compensation in the fourth quarter, responding to political pressure that will probably persist as details of bonuses for their top executives emerge in coming weeks.
The three Wall Street firms set aside $39.9 billion for pay in 2009, below the 2007 record of $44.7 billion. The total fell short of the $46.1 billion five analysts expected this month and is almost $10 billion less than what some analysts estimated in October.
"There’s no question that Wall Street got the message from Washington," said Michael W. Robinson, a senior vice president of Levick Strategic Communications and former head of public affairs at the Securities and Exchange Commission. "But positioning the big banks with big bonuses as the bad guys has played well for politicians, and they are likely going to keep coming back to it. To some extent, banks are just going to have to be prepared for that."
President Barack Obama called bank bonuses "obscene" for the second time in a week on Jan. 21. The next day, Democratic Representative Andre Carson called the industry’s practices "reckless" during a House Financial Services Committee hearing on compensation. Banks are disclosing stock awards handed out to top executives in the next few weeks.

Gorman’s Stock Grants

Morgan Stanley submitted filings for 10 of its executives and directors on Jan. 22. James Gorman, who became the firm’s chief executive officer at the start of this year, was awarded deferred stock grants valued at about $8.6 million for 2009, the filings showed. Walid Chammah, co-president until this year, received stock awards valued at a total of $6.6 million. John Mack, the firm’s CEO until this year and still its chairman, didn’t take a bonus.
Lloyd Blankfein, 55, and Jamie Dimon, 53, the CEOs of Goldman Sachs and JPMorgan, and Mack, 65, 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.
At Goldman Sachs, Morgan Stanley and JPMorgan’s investment bank, all based in New York, pay expenses equate to about $24 billion in bonuses, based on pay consultant Options Group’s estimate that year-end awards account for 60 percent of total compensation costs. While that would be an increase of 29 percent from the estimated levels of a year ago, it’s below the estimated payout for 2007.

‘Buckling’ to Pressure

Goldman Sachs subtracted $519 million from its compensation pool in the fourth quarter and made $500 million in charitable donations. That brought full-year pay costs to $16.2 billion, or
36 percent of revenue, the smallest portion since the firm went public in 1999.
Goldman Sachs’s decision reflected "management buckling to media/Washington pressure on pay," Macquarie Group analyst David Trone wrote in a note to investors. "Paying out at a 36 percent rate is unlikely to be attempted two years in a row, lest the company see an outflow of talent and its franchise destroyed."
Goldman Sachs Chief Financial Officer David Viniar said the firm tried to "balance the needs of the public versus being fair to our people" on compensation, and he doesn’t expect many employees to leave in protest about the pay cuts.

Six Times Median Income

Even with lower amounts allocated in the fourth quarter, the compensation costs are enough to pay each employee at the three firms $336,843, more than six times the U.S. median household income of $50,303 in 2008. Individual compensation varies widely within investment banks, with low-level employees often earning bonuses of less than $100,000 while global division heads may receive compensation topping $10 million, according to an Options Group report.
"The American taxpayers are angry that their tax dollars lifted many financial firms in a time of crisis while some of these same firms now have reported record profits and are handing out lavish bonuses," Carson said at the hearing. "Some of these firms have not turned around yet, but continue to follow reckless compensation practices."
Goldman Sachs employee stock awards will be priced at the Jan. 22 closing level, according to a person familiar with the situation. The 8.1 percent drop in the stock that day and Jan.
21 means the executives will receive a greater number of shares than they would have earlier in the week and have more opportunity to profit. Executives are restricted from selling the shares for five years, prohibiting them from pocketing any quick gains.

Earnings Boost

JPMorgan allocated $549 million for investment-bank compensation in the fourth quarter, down 80 percent from the third quarter. That brought full-year compensation costs at the investment bank, which more than doubled its revenue from 2008, to $9.33 billion.
Morgan Stanley, which added 15,000 employees in June through its Morgan Stanley Smith Barney wealth-management joint venture, set aside $14.4 billion for pay, less per employee than in 2007.
The lower costs helped Goldman earn $4.95 billion in the fourth quarter, bringing its full-year profit to $13.4 billion.
JPMorgan earned $11.7 billion for the year, while Morgan Stanley reported full-year net income of $1.35 billion.
Payment of bonuses in stock rather than cash can result in higher reported earnings because the firms often don’t have to record the expense on their income statements until the shares vest. Viniar said the vesting schedule didn’t materially lower Goldman’s compensation ratio.

Bonus Filings

Firms detail the compensation of five of their highest ranking executives in a proxy statement sent to investors before their annual meetings. Officers and directors of the firm must submit filings to the SEC disclosing shares they’re awarded within days of receiving them.
Those filings may receive more attention this year because banks are expected to pay a greater portion of compensation in stock in part to satisfy regulators’ calls to tie pay to long- term performance. Goldman Sachs said last month that its top 30 executives will get bonuses entirely in stock that they can’t sell for five years.
Stanley Robinson, a spokesman for Goldman Sachs, and Morgan Stanley spokesman Mark Lake declined to comment beyond the firms’ statements. Kristin Lemkau, a JPMorgan spokeswoman, didn’t return calls for comment.
Bank of America in Charlotte, North Carolina, and New York- based Citigroup Inc. don’t break out compensation data for their investment-banking units.
Barclays Plc’s top executives including CEO John Varley and President Bob Diamond may defer as much as 100 percent of bonuses, the Financial Times reported on Jan. 22.

I believe Diamond made something like $60 M when Barclasy sold iShares to BlackRock.