Wall Street Record Bonuses Return as Big 3 May Pay $30 Billi

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Wall Street Record Bonuses Return as Big 3 May Pay $30 Billion

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 Nov. 9 (Bloomberg) -- Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co.'s investment bank, survivors of the worst financial crisis since the Great Depression, are set to pay record bonuses this year.

The firms -- the three biggest banks to exit the Troubled Asset Relief Program -- will hand out $29.7 billion in bonuses, according to analysts' estimates. That's up 60 percent from last year and more than the previous high of $26.8 billion in 2007. The money, split among 119,000 employees, equals $250,400 each, almost five times the $50,303 median household income in the U.S. last year, data compiled by Bloomberg show.

The three will award more in stock and defer more cash payments under pressure from regulators to tie pay to long-term results, compensation experts said. They may still face public wrath over the size of bonuses after the government injected capital into all the major financial institutions following Lehman Brothers Holdings Inc.'s collapse in September 2008.

"Wall Street is beginning to resemble Clark Gable as Rhett Butler in the film 'Gone With the Wind': 'Quite frankly, my dear, I don't give a damn,'" Paul Hodgson, a senior research associate on compensation at the Portland, Maine-based Corporate Library, said in an e-mail. "It doesn't seem as if even political threat, disastrous PR, envy, rising unemployment rates and home repossessions is enough to get any of these people to refuse the bonuses they have 'earned.'"

Fixed Income, Commodities

Bonuses for employees in fixed income will likely jump the most, 40 percent to 45 percent, while employees in asset management may see no growth in their year-end bonuses, according to a report from Options Group, a New York-based executive search and compensation consultant firm.

Average bonuses for employees at financial firms worldwide will rise about 35 percent to 40 percent this year, according to the annual report, which is set to be released this week. They will still remain below 2007 levels after dropping an average of 40 percent to 45 percent last year, the report said.

Managing directors in high-yield credit sales are expected to see some of the largest average increase in bonuses, a 50 percent jump to a range of $1.3 million to $1.7 million. The bonuses of directors in commodity sales units may also climb 50 percent to a range of $650,000 to $850,000, the report said. Managing directors in commodities trading will receive the largest bonuses, an average of $4 million to $6 million each.

The report didn't break out bonuses from total compensation for positions above managing director.

Clawback Clauses

Morgan Stanley is among banks that are offering a larger portion of bonuses in stock and instituting so-called clawback clauses to tie incentive pay to risk, the report said. JPMorgan and UBS AG are also raising base salaries for some employees to reduce the share of bonuses in total pay.

"Wall Street is all about creating wealth, and when banks start making money again, they have to pay their people," said Michael Karp, co-founder of Options Group. "But because there's so much public scrutiny, people will be very sensitive in terms of putting caps on some of these cash figures, and you'll see a lot more in stock."

Securities firms typically use slightly less than half of their revenue to pay salaries, benefits and bonuses, a percentage that is adjusted throughout the year. In the first nine months, Goldman Sachs, Morgan Stanley, and JPMorgan's investment bank told their shareholders that they set aside $36.4 billion for compensation, up 27 percent from the same period a year earlier.

Goldman Sachs

The three New York-based firms will likely set aside $49.5 billion for compensation for the full year, according to estimates from David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller in New York. That's up from $30.9 billion last year and $44.7 billion in 2007.

The rise in compensation is led by Goldman Sachs, which had record profit in the second quarter. Its compensation expense is expected to more than double from last year to $21.9 billion, or about $691,000 per employee, according to Trone's estimates. The expense at JPMorgan's investment bank is expected to jump 55 percent to $12 billion, about $482,400 for each employee, while Morgan Stanley's compensation cost will rise 27 percent to $15.6 billion, or $252,000.

Year-end bonuses usually account for about 60 percent of compensation, the Options Group report said. While the total this year is expected to be greater than in 2007, it will come to less per employee than the $256,000 paid out that year by the three firms because of increased staffing.

Bank of America in Charlotte, North Carolina, and New York- based Citigroup Inc. don't break out compensation data for their investment-banking units.

'We Made It'

More than a third of Wall Street finance professionals expect their bonuses to increase for 2009, according to a survey by eFinancialCareers.com, a job-search Web site specializing in the financial industry. Of the 1,074 people who responded to an e-mail poll conducted by the company in September, 36 percent said they're anticipating a bigger annual payout and 11 percent said it will jump by at least half.

Wall Street is behaving like, "We made it through the storm, and now it's back to doing things that we know how to do in our comfortable environment," said Mark Borges, compensation consultant at Compensia Inc. in Corte Madera, California. "It really runs counter to the things you're hearing out of the administration, about how things have to change."

Fed Guidelines

The Fed said last month it will review the 28 largest banks to ensure that compensation doesn't create incentives for the kinds of risky investments that brought the global financial system to the edge of collapse, prompting bailouts of firms including Bank of America and Citigroup. It also offered guidelines on making pay more tied to risk management.

Lloyd Blankfein, Jamie Dimon and John Mack, the chief executive officers of Goldman Sachs, JPMorgan and Morgan Stanley, were summoned to the Federal Reserve Bank of New York on Nov. 2 by President William Dudley. They were told they had to follow the new rules, people familiar with the matter said.

Blankfein set a Wall Street pay record in 2007 when he was awarded a $67.9 million bonus on top of his $600,000 salary. He went without a bonus last year after the firm reported its first quarterly loss and accepted financial support from the government. Other bank CEOs, including Citigroup's Vikram Pandit and Morgan Stanley's Mack, also didn't take bonuses in 2008.

Feinberg Rules

Kenneth Feinberg, the Obama administration's special master on pay, ordered pay cuts Oct. 22 averaging 50 percent for top executives at seven taxpayer-rescued companies and will rule on the pay structures of the 26th to 100th highest-paid employees at those firms by the end of the year.

Feinberg's decisions on the second tier could have more influence on other companies than his initial rulings, said Rose Marie Orens, a senior partner at Compensation Advisory Partners LLC in New York.

"Here he gets to see the methodology," said Orens. "If a company says it's paying from revenue, he can come back and say it would be better if you paid out of profits. He has that kind of latitude."

Feinberg's rulings are "making their way into the hallways of non-financial companies," even if they aren't likely to influence pay practices at private equity firms or hedge funds, she said.

Wall Street firms may have to find other ways to stagger payments. Even shifting compensation to stock from cash might not blunt attacks from politicians and a U.S. public that faces a 10.2 percent unemployment rate, the highest since 1983.

Executives who received stock awards early this year in the midst of the credit crisis are gaining from the rally in bank stocks. The Standard & Poor's 500 Financials Index has risen 24 percent so far this year and has more than doubled from an almost 17-year low on March 6.

Getting 'Creative'

"The big firms are going to need to be very creative now, because of the populist sentiment," Peter Weinberg, 52, a founder of New York-based Perella Weinberg Partners LP, said last week at the "Capitalism and the Future" forum co- sponsored by Bloomberg LP and the Aspen Institute in New York. "It is very, very intense, it is bitter, and I understand it."

Weinberg, who ran Goldman Sachs's international operations from 1999 to 2005, is a grandson of Sidney Weinberg, the firm's senior partner from 1930 to 1969.

Credit Suisse decided last year to use leveraged loans and commercial mortgage-backed debt, some of the securities blamed for generating the financial crisis, as part of variable compensation for senior employees. The bank told employees in August that the pool of toxic assets gained 17 percent since January, according to a person familiar with the matter.

'Adding Risk'

Weinberg said one possibility would be for large firms to take part of their bonus pool and use the funds to serve a function helpful to the economy, such as a small-business lender. Employees could be paid years later from the profits of the new entity.

"One thing they could do is to take an amount of money that would have been used for compensation and make a commercial investment that ultimately would go to those who would have been compensated," Weinberg said. "You're not taking away compensation that arguably was due to them, but what you're doing is you're adding risk to it."

While banks may change the way they structure pay, they probably can't avoid disclosing the money as compensation, said Steven W. Rabitz, a former compensation lawyer at Goldman Sachs and Lehman Brothers Holdings Inc. who now works as a partner at law firm Stroock & Stroock & Lavan LP in New York.

"One way or another there's going to be some kind of disclosure," Rabitz said. "The devil is in the details. People are talking about the details, and people are talking about the structures."

'Perfectly Correlated'

Goldman Sachs is considering a new charitable program and has been working with Bridgespan Group, a Boston-based philanthropy consulting and recruiting firm, people familiar with the matter said last month. A charitable gift may be announced by the end of the year, when the firm awards bonuses.

Lucas van Praag, a spokesman for Goldman Sachs in New York, declined to comment on the firm's compensation plans for this year. He said the company ties its pay closely to revenue.

"Over the last eight years compensation at Goldman Sachs has been perfectly correlated with net revenue," van Praag said. "The average annual earnings generated per employee over the same period are $221,731, which is 67 percent more than our next most profitable competitor."

Kristin Lemkau, a JPMorgan spokeswoman, and Mark Lake, a spokesman for Morgan Stanley, both declined to comment.

New York Taxes

A jump in Wall Street bonuses this year may bring relief to Albany and New York City as the state and its biggest metropolis struggle with a combined $14 billion in budget deficits this fiscal year and next. The benefit may be muted since many of the bonuses will be awarded in stock that isn't taxed immediately.

Before the financial meltdown slammed bank earnings last year, Wall Street's compensation and corporate profits provided 20 percent of New York state tax revenue and 9 percent of the city's taxes. Bonuses in 2008 fell 44 percent from the prior year, to $18.4 billion, according to New York State Comptroller Thomas DiNapoli.

The reduction cost the state $1 billion in income tax revenue and New York City $275 million, he said. State personal income tax collections in first six months of the current fiscal year declined $4.4 billion, or 21.6 percent, from the same period a year earlier, DiNapoli's September cash report said.

'Not as Rosy'

The size of this year's bonus payments to investment bankers and the public profile of the firms have obscured the struggles occurring in other parts of the finance industry, said Orens, of Compensation Advisory Partners.

More than 337,000 financial jobs have been eliminated worldwide since the middle of 2007, according to data compiled by Bloomberg. Finance industry jobs in New York City have fallen by 41,400 in the two years through August, according to the New York State Department of Labor.

"It's a narrow area, though clearly large in terms of dollars," Orens said. "Asset management is still hurting, the hedge funds are still down, many haven't met their performance hurdles, and the normal lending functions and real estate are not pretty. It's not as rosy everywhere else."

To contact the reporters on this story: Michael J. Moore in New York at ikatz2@bloomberg.net.