On Wall Street, The Incredible Shrinking Bonus
From CEOs to secretaries, Wall Street's miserable year is about to hit where it hurts. Two compensation experts set to release projections for bonus payments predict they will plummet 20% to 50% from last year.
It will be the second consecutive drop following a four-year surge, with the deepest cuts affecting bankers and traders in businesses that blew up during the credit crisis, including structured finance and mortgage-backed securities. Bonuses in areas that haven't been pummeled as badly, such as asset management and brokerage units, will suffer smaller declines.
'It's not going to be pretty,' said Michael Karp, chief executive of the Options Group, which based its projections on polls of Wall Street employees and company disclosures of compensation during the first three quarters.
Even star performers might see their pay stuck at last year's levels, Mr. Karp said, with other 'top' talent taking a hit of 20% to 30% and 'everyone else' down 40% to 75%.
Compensation consultant Johnson Associates Inc., which has a slightly less somber view of overall payouts, projects that bonuses for chief executives and other top executives whose compensation must be disclosed to shareholders will tumble 60% to 70%.
Typically, half of all revenue at firms such as Goldman Sachs Group Inc. and Morgan Stanley goes to pay employees. As business skids and job cuts mount, Wall Street employees still left already were girding themselves for smaller bonuses. Now political heat and an inquiry by New York Attorney General Andrew Cuomo are creating pressure to 'ratchet down the numbers,' Mr. Karp said.
In particularly hard-hit areas such as structured credit, which churned out collateralized debt obligations that blew holes in many Wall Street balance sheets, managing directors could see their bonus fall 50% to $750,000 to $950,000, according to the Options Group. Their base pay is about $200,000 a year. Vice presidents with three years of experience in the same area could expect a 55% cut in bonus to $200,000 to $250,000, on top of a base of $130,000 to $150,000.
Among investment bankers who maintain contact with corporate clients but don't make trading decisions, managing directors could see their bonus fall 50% to between $900,000 and $1.1 million.
Bonuses will shrink less in businesses that have held up relatively well. In foreign-exchange trading, a managing director could expect a 15% drop in bonus to $1 million to $1.5 million, Options Group predicts.
In commodities, where prices surged and then fell, a managing director could see a 25% drop to a bonus of $3.5 million to $4 million.
Starting next year, some Wall Street firms may attempt to move to a multiyear, performance-based pay structure that would address instances of business groups that report profits one year by taking risks that blow up later, triggering losses.
Randall Smith
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