When a banker from Deutsche Bank recently sat down for dinner with a friend at an upscale Manhattan restaurant, the two started joking about who would pick up the check.
"I'll pay with my deferred-stock chips," the banker joked, referring to shares Deutsche Bank is paying some of its employees instead of cash.
Financial-industry executives around the world are grappling with the new realities of pay and spending. Volatile markets, weak economies and new regulations are crimping profits—and putting workers at all levels in a squeeze.
Normally, February is a time of year when financial-industry executives are flush with bonus cash and searching for places to spend it. Now many are staring at shrunken cash payouts and looming bills at home.
Bankers still make regal salaries relative to the rest of America. But the income shocks on Wall Street over the past few years show why even the highest earners are increasingly vulnerable to cash squeezes—caught between bonuses that increasingly are paid in stock and luxury expenses that continue to soar even in a down economy.
The result: High earners who once spent on wants are now increasingly thinking about "needs" (needs being relative for $40,000-a-year-private kindergartens). Executives who once regarded their seven-figure bonuses as fair compensation for their grueling hours and rare skills are being forced to examine their lifestyle.
Bankers aren't the only ones grappling with volatile high incomes. As a growing number of corporate executives and entrepreneurs derive their wealth from stock-based pay rather than cash-based pay, they are exposed to more extreme, and more sudden, fluctuations in their cash flows. The challenge for many high earners now is figuring out how to smooth out income streams, reduce big expenses and avoid a liquidity crunch.
Wealth managers and compensation consultants say it all comes down to selective spending, a careful mix of investments and a psychological understanding of self-worth and net worth.
Of course, some bankers will hardly notice the smaller bonuses. Regular salaries went up for many after the recession to make up for lower bonuses. Salaries for managing directors can often top $250,000. Factoring in the cash bonuses, most are easily in the top 1% of earners. Senior bankers who have sold stock over the years and invested conservatively have plenty of cash to carry them over the income bumps.
Yet the economics of Wall Street have changed, many say for good, as profits at the big banks come under strain.
This year, many banks have imposed new limits on cash bonuses. Morgan Stanley is capping them at $125,000, and some executives won't get any cash until later this year. Barclays is limiting the cash component of bonuses to £65,000 (about $103,000).
Under Deutsche Bank's new system, the bank will pay out a maximum of €100,000 (about $131,000) in cash and €100,000 in shares, known as "deferred stock chips," that can't be sold until later this year. UBS is even clawing money back: It decided to take back 50% of share-based bonuses awarded last year to investment bankers whose bonuses exceeded two million Swiss francs (about $2.2 million).
For many bankers, after-tax cash bonuses of less than $60,000 represent a fraction of the seven-figure checks they received in previous years. Many built their lifestyles on the assumption that those bonus checks would go on forever, becoming as routine as their February ski trips to Aspen and summer pilgrimages to the Hamptons.
"For any banker who's been in the business more than a few years, this is a new reality," says Michael Holland, who runs investment firm Holland & Co. "The smart and conservative ones probably prepared for this. But there are a lot of bankers who now have to cut back the whole consumption part of their lives."
Burn Baby, Burn
The lifestyle costs, or what bankers call their "burn rates," can be substantial. For a typical top Wall Street executive with a family of four, the cost of a Manhattan apartment, household staff and private school can easily top $500,000 a year, consultants and bankers say. That doesn't include the restaurants, clothing, second- or third-home upkeep and charity dinners that also are fixtures in finance.
"It's like the Wilkins Micawber principle from Charles Dickens," says Keith Whitaker, a consultant at Wise Counsel Research Associates, which advises wealthy families. "If you make $100,000 a year and your expenses are $99,000, that's bliss. If you make $100,000 and your expenses are $101,000, the result is misery."
For now, bankers are mainly trimming around the edges, in hopes that the income dip is temporary.
H. Dolly Lenz, one of New York's top luxury real-estate agents, says bankers have cut back their spending in recent years. Few are downsizing, but many are postponing plans for bigger apartments or putting off a vacation-home purchase.
"Normally this time of year is one of the best times in New York real estate," Ms. Lenz says. "Bankers would be spending the money they just received and we would see a flurry of activity. Not this year. It's very quiet."
While rentals in the Hamptons for this summer are strong, sales are weak, Realtors say.
A decade ago, Ms. Lenz says, Wall Street bankers made up the majority of her clients looking to buy in New York and the Hamptons. Now, she says, "I haven't got a single one." Her clients now are mostly entrepreneurs and dot-commers.
To slash their housing costs, some bankers are refinancing their mortgages or personal credit lines to take advantage of low interest rates, according to wealth advisers. Many bankers have multimillion-dollar mortgages, so even a small reduction in their interest rate can make a big difference. Cutting the rate on a $2 million "jumbo" mortgage to the current 4.5% from 5.5% can save more than $1,200 a month, or more than $14,000 a year.
"A big dial mover for these folks has been refinancing debt," says Katie Nixon, chief investment officer for personal financial services at Northern Trust and an adviser to many top Wall Street executives.
Wall Streeters also are learning how to trim their household overhead. Steven Laitmon, co-founder of the Calendar Group, a Westport, Conn.-based staffing firm, says many bankers have consolidated their staffs. A family that might have had a butler, private chef, laundress, nanny and cleaning person might now have only a cleaning person "who also does some cooking and is child-friendly."
Rather than employing personal assistants at home, some bankers are using the executive assistants at their offices to handle some of their personal logistics. To fill those duties, many Wall Street banks are looking for secretaries with personal-assistant experience, Laitmon says.
"I think some bankers realized they were over-staffed at home and now they're trimming," he says.
Cutting education—another big expense in New York and London in particular—is generally off limits for bankers. Although top private schools can run more than $40,000 a year, bankers say cutting their kids' education is a last resort.
"Guys on Wall Street would sell the Hamptons house and their art collection before they would take their kids out of a top school," says one Morgan Stanley banker. "Education is an essential." The top end of the art market has recovered quickly from the recession, so selling now might not be a bad move.
Alan Johnson, head of Johnson Associates, the compensation consultancy, said sports cars and other toys are other easy cuts. "It's particularly uncool on Wall Street now to have a big beautiful Mercedes or sports car," he says.
Natasha Pearl, founder of Aston Pearl, which often advises wealthy families on paring their budgets, says high-earners also can save on their "vendor expenses"—everything from florists and landscaping crews to travel agencies and caterers.
"Until you really analyze your budget, you don't realize that the bill for your arborist has gone up 20% over the past five years, and it's not because you have more trees," she says.
Cost cutting isn't the only answer to the bonus crunch. Wealth advisers say their Wall Street clients are reshuffling their portfolios to withstand more frequent income shocks.
Northern Trust's Ms. Nixon says many bankers have been preparing for lower pay for years. They have boosted their cash reserves, paid off their debts and diversified into ultrasafe investments, like municipal bonds and Treasurys, to offset the risks of all the shares they hold in their banks.
She advises bankers to do detailed analyses of their spending and figure out how long they plan to maintain their current budget. Once they know the annual number, they know how much cash they need to set aside and how much income they need from the safest investments that won't fluctuate with Wall Street. She says bankers typically fund these investments with their years of accumulated bonuses and stock sales.
Still, some bankers are going through a more profound soul searching and lifestyle change, as the value system that sustained them for years comes under threat. Demonized by the public at the same time their pay is declining, some bankers are looking more deeply at their reliance on outsize annual bonuses, wealth managers say.
Keith Whitaker, an adviser to wealthy families, including some in finance, says bankers can all too easily define themselves by their bonuses. Bankers, he says, work grueling hours and believe they earn their pay.
"They say, 'I deserve this and I deserve to live in this house and send my children to that school and maintain this standard of living,'" he says.
"Behind those costs is the belief that your sense of well-being depends on where your kids go to school or what ZIP Code you live in or how big your house is or what kind of car you drive," Whitaker says. "But they can ask themselves, do I really need to be in this house and love this community, or is it an immense burden?"
Asking the deeper questions can lead to easier cost-cutting, Whitaker says.
"I don't start with 'Well, how much of your arm should we cut off?' but 'What are your beliefs, and are these things working for you?'" Whitaker says. "That way the focus is not on the arm."