Tuesday, January 17, 2012

Bankers Brace For Bonus Blues?

Want to follow-up on an earlier story. Michael Moore of Bloomberg reports, Morgan Stanley Said to Limit Cash Bonuses:

Morgan Stanley (MS), owner of the world’s biggest brokerage, is capping immediate cash bonuses at $125,000 as the firm curtails pay and defers more compensation for senior executives, according to a person briefed on the plans.

Members of the company’s operating committee, led by Chief Executive Officer James Gorman, 53, won’t get any immediate cash, said the person, who declined to be identified because the plan hasn’t been made public. Mark Lake, a spokesman for the New York-based bank, declined to comment.

The decision comes after a fourth quarter that some analysts predicted was the worst for trading and investment- banking revenue since the financial crisis. Increased salaries and previous moves toward deferring more pay have limited investment banks’ flexibility to cut compensation costs, analysts including Atlantic Equities’ Richard Staite have said.

Morgan Stanley’s decision will increase the average amount of pay deferred to about 75 percent, the person said. The firm deferred an average of 60 percent in 2010 and 40 percent in 2009. Deferred cash for 2011 performance will be paid out in two equal installments in the final month of 2012 and 2013, a change from the previous deferral plan that paid out in thirds over 18 months, the person said.

Details about the compensation plan were reported earlier by the Wall Street Journal.

Morgan Stanley’s investment-banking unit set aside $5.74 billion for pay in the first nine months of 2011, an 8 percent increase from a year earlier. Companywide compensation and benefits rose 6 percent to $12.7 billion as revenue climbed 13 percent.

Junior Employees

The amount deferred for junior employees won’t exceed 25 percent of their bonuses, and those who are paid less than $250,000 annually won’t have any cash deferred, the person said. Some of Wall Street’s biggest firms are considering freezing pay levels for some junior bankers, people familiar with the deliberations said earlier this month.

Credit Suisse Group AG (CSGN) is likely to suspend its practice, an industry norm, of boosting pay automatically each year for analysts, associates and vice presidents within the investment- banking division, a person with direct knowledge of the decision said. While those employees will get their regular annual salary increases, bonuses probably will be lowered to keep total pay flat from a year earlier, the person said.

And across the Atlantic, investment bankers brace for more ‘doughnut’ bonuses:

The bars around London’s finance district may soon start filling up with bankers fresh from pay discussions, but not many will be there to splash their bonus cash.

This year zero bonuses, known as “doughnuts”, will affect even senior staff and could include a bigger proportion of employees than in the 2008 financial crisis, bankers and headhunters predicted as U.S. firms start telling bankers this week what they will get.

Slumping quarterly profits, a darkening long-term outlook for the industry and unrelenting pressure from politicians and an angry public, are pushing bank bosses to break away from a culture in which most staff expect a bonus every year and base their personal budget around it.

“This will probably be the worst year for zero bonuses we’ve seen, although those that will have done well will still get something,” said Jason Kennedy, who runs recruiting firm Kennedy Group.

“Global heads and senior managing directors are among those that will get nothing—they’re the expensive staff, and they’ll be living off their higher salaries.”

Underperforming bankers already came under pressure in the 2010 bonus round as “doughnuts” multiplied, but this time division heads are raising the bar and reserving payouts for an even smaller group of star bankers.

Bonuses would be down at least 30 percent for those that do get one, Kennedy said, while other recruiters predict cuts of up to 70 percent in some areas, such as bond trading.

Bankers at Goldman Sachs, Morgan Stanley, JP Morgan and Citi are among those expecting to hear about their bonuses this week, coinciding with these firms’ fourth quarter results.

Overall pay at JP Morgan’s investment bank came in at $8.8 billion, down 9 percent on 2010 levels, while total revenues for the year were flat, its filings showed last week.


Bonuses are only one part of those pay costs, however. Since 2009, salaries have often doubled for top investment bankers, to around 350,000 pounds ($536,500) on average, according to recruiters’ estimates.

This was after firms tried to find ways around a bonus tax in Britain and tougher rules on rewards across Europe. It put additional pressure on bonus pots, through which firms still have some leverage to cut pay costs.

Senior bankers in charge of bonus decisions for their teams have been talking tough about pay for months, preparing staff for lower payouts by pointing to the thousands of jobs being cut across the industry and to the rise in salaries.

“We’ve got to be realistic. We’re not talking hardship here,” said a division head at one major U.S. firm.

“There is a psychological impact when you don’t get a bonus—it used to mean you’re not doing well and could be let go. It doesn’t make the (bonus) conversation very easy, but this year there will be strength in numbers.”

Many expect these senior bankers to be among those to forgo big payouts, partly as a move to appease disgruntled staff.

“They have to be seen to be whiter than white, and not to be necessarily paying themselves but the performers in their teams,” said Jonathan Evans, chairman of headhunters Sammons Associates.


The rise of “doughnuts” will not mean the end to bonuses or to public anger over payouts.

At government-controlled banks like Britain’s Royal Bank of Scotland, where bonuses are likely to total between 400 million and 500 million pounds, according to sources and company reports, these rewards are still under fire.

“It’s extremely difficult to justify any bonus at all at a state-owned bailed-out bank,” British Conservative Member of Parliament Steve Baker told Reuters.

Baker joined about 40 anti-capitalist protesters from the “Occupy London” movement in a gathering outside the offices of Britain’s financial watchdog last week, condemning excessive executive pay.

Ahead of this year’s bonus season, the British government has also moved to clamp down on rewards by suggesting shareholders should get a veto on pay.

As scrutiny of investment banks’ pay practices mounts, many are already taking their own steps to amend the structure of rewards, beyond just cutting them.

Morgan Stanley will reportedly tell employees this week that cash payouts will be capped at $125,000, with any portion received above this deferred until at least the end of the year. Top management might defer their entire bonuses for 2012.

What's going on? Are the glory years of investment banking behind us? You bet they are, and it will only get worse, especially for those junior bankers. They are better off joining a Canadian public pension fund (I'm not kidding).

I see a long-term secular decline in the finance industry where employment as a share of GDP will contract. This isn't necessarily a bad thing. Lots of Wall Street banks were sucking valuable human capital away from traditional industries. We have too many financial engineers and not enough mechanical and electrical engineers. All these "whiz kids" making half a million dollars a year "creating structured crap" or "programing algorithms" for high frequency trading platforms are more valuable to society in other industries.

And take it from a guy with progressive multiple sclerosis who's seen it all, the whole industry is full of shit and there are way too many overpaid weasels and psychopaths on Wall Street and even some at Canadian public pension funds. There is a bonus 'culture of entitlement' that is way out of whack.

How will disgruntled bankers react? Some of them will head off to work for a hedge fund or start their own hedge fund. I wish them luck. Most hedge funds are coming off a very humbling year and institutional investors are chopping their fees. And unlike investment bankers, hedge funds have significant skin in the game. If they perform, they get rewarded, and if they don't, they feel the pain and get massacred (or close shop and reopen under a different name!). Of course, as one institutional investor reminded me, hedge funds buy Ferraris while clients get phantom gain.

But don't shed too many tears for bankers. The invisible hand behind Wall Street bonuses is tightening its grip, but bankers are still extremely well paid relative to the rest of society. As Kevin Roose of Dealbook so aptly comments: "to those in industries unaccustomed to large year-end bonuses, even the paltriest Wall Street bonus would rank as a princely sum."

Below, the WSJ's Deborah Kan speaks to Alison Tudor on Morgan Stanley's banker bonus blues. I also embedded an excellent PBS Newshour interview where Judy Woodruff discusses what the declining dollars tell us about the big firms with financial writer William Cohan and compensation consultant Brian Foley.

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