Top Wall Street firms slash bonuses

09:10, January 26, 2010      

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Goldman Sachs Group Inc, Morgan Stanley and JPMorgan Chase & Co's investment bank slashed their compensation in the fourth quarter, responding to political pressure that will probably persist as details of bonuses for their top executives emerge in coming weeks.

The three Wall Street firms set aside $39.9 billion for pay in 2009, below the 2007 record of $44.7 billion. The total fell short of the $46.1 billion five analysts expected this month and is almost $10 billion less than what some analysts estimated in October.

"There's no question that Wall Street got the message from Washington," said Michael W Robinson, a senior vice-president of Levick Strategic Communications and former head of public affairs at the Securities and Exchange Commission. "But positioning the big banks with big bonuses as the bad guys has played well for politicians, and they are likely going to keep coming back to it. To some extent, banks are just going to have to be prepared for that."

US President Barack Obama called bank bonuses "obscene" for the second time in a week on Jan 21. The next day, Democratic Representative Andre Carson called the industry's practices "reckless" during a House Financial Services Committee hearing on compensation. Banks are disclosing stock awards handed out to top executives in the next few weeks.

Morgan Stanley submitted filings for 10 of its executives and directors on Jan 22. James Gorman, who became the firm's CEO at the start of this year, was awarded deferred stock grants valued at about $8.6 million for 2009, the filings showed. Walid Chammah, co-president until this year, received stock awards valued at a total of $6.6 million. John Mack, the firm's CEO until this year and still its chairman, didn't take a bonus.

Lloyd Blankfein, 55, and Jamie Dimon, 53, the CEOs of Goldman Sachs and JPMorgan, and Mack, 65, defended their firms' pay practices in a Jan 13 hearing of the Financial Crisis Inquiry Commission. They said making senior executives hold shares they receive as compensation aligns their interests with shareholders.

At Goldman Sachs, Morgan Stanley and JPMorgan's investment bank, all based in New York, pay expenses equate to about $24 billion in bonuses, based on pay consultant Options Group's estimate that year-end awards account for 60 percent of total compensation costs. While that would be an increase of 29 percent from the estimated levels of a year ago, it's below the estimated payout for 2007.

'Buckling' to pressure

Goldman Sachs subtracted $519 million from its compensation pool in the fourth quarter and made $500 million in charitable donations. That brought full-year pay costs to $16.2 billion, or 36 percent of revenue, the smallest portion since the firm went public in 1999.

Goldman Sachs's decision reflected "management buckling to media/Washington pressure on pay," Macquarie Group analyst David Trone wrote in a note to investors. "Paying out at a 36 percent rate is unlikely to be attempted two years in a row, lest the company see an outflow of talent and its franchise destroyed."

Goldman Sachs Chief Financial Officer David Viniar said the firm tried to "balance the needs of the public versus being fair to our people" on compensation, and he doesn't expect many employees to leave in protest about the pay cuts.

Even with lower amounts allocated in the fourth quarter, the compensation costs are enough to pay each employee at the three firms $336,843, more than six times the US median household income of $50,303 in 2008.

Individual compensation varies widely within investment banks, with low-level employees often earning bonuses of less than $100,000 while global division heads may receive compensation topping $10 million, according to an Options Group report.

Goldman Sachs employee stock awards will be priced at the Jan 22 closing level, according to a person familiar with the situation.

The 8.1 percent drop in the stock that day and on Jan 21 means the executives will receive a greater number of shares than they would have earlier in the week and have more opportunity to profit.

Executives are restricted from selling the shares for five years, prohibiting them from pocketing any quick gains.

JPMorgan allocated $549 million for investment-bank compensation in the fourth quarter, down 80 percent from the third quarter.

That brought full-year compensation costs at the investment bank, which more than doubled its revenue from 2008, to $9.33 billion.

Source: China Daily
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