Bonuses Down, Base Pay Up

How is Wall Street responding to the political flak over bonuses? By raising the base pay of senior executives. Morgan Stanley is the first to do so, with increases of over 100% for key members of their top brass. Speculation is that its thousands of managing directors also will enjoy substantial salary increases. UBS is another leading firm that is going in this direction. For more details, see the "breakingviews.com" column in yesterday's New York Times business section.

When the Clinton administration raised tax rates in 1993, limiting the tax deductibility of executive pay in excess of $1 million was part of the package. The result? An explosion in stock option awards, which were not covered by the legislation. Stock options have since drawn a lot of criticism. Now the political heat placed on bonus awards may be ratcheting up fixed employee compensation costs, which will have the undesirable effect (from shareholders' perspectives, at least) of making it tougher to cut them when profits are down, apart from making employment even more cyclical in the industry.