On Wall Street, they are calling the current bonus season a "make-up" year.
Finance foot soldiers expect payouts that will "make up" for the anemic year-end checks of 2008. Meanwhile, finance executives have to "make up" new formulas for compensation -- bonus structures that will retain talent and encourage good work, while keeping Congress, shareholders and Main Street from crying foul.
"This will probably be the most challenging year ever for firms to figure out bonuses," said Michael Franzino, a managing director who recruits finance executives for Korn/Ferry International, a Los Angeles-based search firm. "Nobody really knows what is going on, and no one wants to be first mover."
Generally, year-end lump sums account for 60% of average compensation for those in the trenches of Wall Street, and about a third of a typical bonus is paid in cash.
This year, however, the biggest firms in finance will be watched closely by U.S. taxpayers, whose tax dollars were used to prop up many of them, and the lawmakers and regulators who doled out the rescue funds.
"Think about being unemployed in Michigan with no prospects for a job, and you see some banker making $5 million," Franzino said. "I guarantee at the local bar, those pitchforks are coming out."
In an effort to mitigate populist ire, Wall Street's biggest players will parcel out a greater percentage of this year's bonuses in stock. They are also extending vesting periods for those shares and instituting tougher "clawback" clauses, measures to rescind blockbuster payments if corresponding business activities lose money in the next few years or if a worker commits fraud.
Goldman Sachs, for example, announced last week that bonuses for its top 30 workers will be paid exclusively in stock that can't be sold for five years. The firm also said that it would grant its shareholders a nonbinding say-on-pay vote, a move that was applauded by its large shareholders and corporate-governance groups.
The bonus equation to date has always been relatively simple. In few industries is the connection between work and value so direct. A trader can point to a specific number quantifying the year's profit. Similarly, teams of bankers have piles of deal fees with which to make their case.
"Historically, Wall Street has been a meritocracy," said Michael Karp, chief executive of Options Group, a New York-based executive-search and compensation-consulting firm that focuses on finance. "It's a clear definition of the eat-what-you-kill-mentality."
But a position that is hugely profitable in one year can lose vast amounts of money the next -- sometimes mere weeks after bonus checks have hit the bank. Tying compensation to long-term performance is the challenge.
A massive bill passed by the U.S. House of Representatives on Friday seeks to do just that, among other things. It would require regulators to sign off on incentive-based pay and it calls for a federal study on bonuses and risk-taking.
Although the legislation is likely months away from a final vote, it is already being considered by finance executives parceling out bonus pools, according to House Financial Services Chairman Barney Frank, (D., Mass.), who wrote much of the proposal.
"I think some firms are going to be guided by a combination of that legislation and the public sentiment about perverse incentives," Frank said.
Not Quite 2007
Still, it was a relatively good year on Wall Street and shareholders have a lot to be happy about. At press time, the Dow Jones U.S. Financial Services Index was up 20% for the year to date, boosted by high-flying shares like those of Goldman Sachs and Morgan Stanley
, which have almost doubled in value.
Given those gains, Wall Street bonuses, on average, will rise by 35% to 40% over last year, but still won't quite reach 2007 levels, according to a study by Options Group.
Workers trading and selling commodities and distressed, high-yield debt will collect the largest bonus checks. Investment bankers will also see big increases, despite the year's relative lack of mergers, acquisitions and public stock offerings.
A managing director in commodity trading, for example, might garner a $4 million to $6 million year-end payout, while a midtier investment-banking associate is likely to collect a bonus between $150,000 and $180,000.
Russ Gerson, chief executive of the New York-based advisory and executive-recruiting firm Gerson Group, said the payments will reflect increased profits and an active recruiting environment.
"The market will be the driving force," he said. "Institutions pay people what they have to pay them to retain them and recruit them."
Those dealing in the structured credit products pilloried in the wake of the crisis -- such as credit default swaps and collateralized mortgage obligations -- will have a meager bonus season.
Which firms will pay the most remains to be seen. A number of finance companies, including Bank of America
, Collins Stewart, and JPMorgan Chase
declined to comment for this article.
Spoils to the Small
While the bulge bracket -- the big fish -- are the target on Wall Street this year, smaller fish will swim free with a belly full of bait.
Boutique and midsize finance firms are not expected to drastically change the structure or levels of their bonuses, because they face much less pressure to rein in compensation. Goldman Sachs may now be a household name the world over, but few people outside of finance have heard of Collins Stewart, Moelis or Perella Weinberg, for example.
Many of the companies that will be most generous in coming weeks don't answer to public shareholders. Others won't draw the attention of regulators because their operations aren't big enough to pose a risk to the economy at-large.
"As long as they're still riding under the radar, there's no reason for them to change their compensation packages," said Michael Wong, who analyzes banks at Morningstar Inc., a Chicago-based research firm. "It might actually be a competitive advantage."
Wong believes that the pay discrepancy will help smaller firms lure top talent -- and market share -- from larger firms in the public eye.
Many finance recruiters expect a wave of job-switching in the spring among workers who receive bonus checks less than their "number," Wall Street jargon for an expected year-end payout.
Frederic Mishkin, an economist who served as a Federal Reserve governor until late 2008, called federal proposals to cap or rule on pay "highly problematic" for financial markets.
"In finance, people move very, very quickly," he said. "Restrictions on compensation from one firm over another can actually have very large consequences."
The industry's biggest players have tried to fix the imbalance by increasing base salaries and rushing to pay back the Temporary Asset Relief Program to escape the pay restraints that go with those funds.
Whether they can meet the bonus expectations of their workers, however, is in question. Still, finance foot-soldiers are expecting a big payday, a "make up."
Korn/Ferry's Franzino said that for a lot of finance workers "it's like 2008 never happened."
"Everybody thinks they're great right now, just because they've survived," he said. "You would think that there would be some humility in the community, but it's all gone by the wayside."
Write to Kyle Stock
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