Bonus Cuts Overview: There have been growing calls for bonus cuts on Wall Street and other financial services firms given the huge losses posted by many firms. There are moves toward bonus clawbacks after companies restate profits downward, especially for high earners like CEOs and other senior executives. The political pressure is the highest with respect to firms that received bailout funds.
Multi-Year Bonus Payouts: Some firms are moving towards multi-year payouts of bonuses, to facilitate retroactive bonus cuts if profits are later revised downward. For example, Merrill Lynch incurred whose huge writedowns over the course of a year that erased all profits from the previous four years. But Merrill could not recoup the vast cash bonuses paid out based on the original profit figures.
EU Bonus Rules: Starting in 2010, the European Union (EU) began mandating restrictions on bonuses at financial services firms. In 2012, more bonus caps were proposed. Follow the link for details, as well as for initiatives undertaken by Swiss banking giant UBS. These rules have ramifications for the industry in other countries.
Executive Bonus Suspensions: The top executives at Goldman Sachs announced that they will accept no bonuses for 2008, being content with their $600,000 base salaries. If nothing else, this is a politically astute move, in light of the controversy over the $700 billion federal financial rescue package, and Goldman's participation therein. Critics of the bill rightly objected that it might end up subsidizing excessive compensation rather than freeing up credit and the securities markets.
The top three executives at Goldman collectively earned $203.5 million in cash and stock in 2007, according to The Wall Street Journal. (Of course, with the precipitous fall in its share price, the value of the stock awards has since evaporated.) Four other top executives also declined bonuses in 2008. Huge as these figures are, they are only the tip of the iceberg. There are roughly 30,000 other employees at Goldman, many of them highly-compensated people in these job categories whose bonuses can reach into the high six figures and beyond in good years, and who are potential candidates to share in the belt-tightening:
The Wall Street Journal also points out that these leading Wall Street firms collectively have paid out a cumulative $312 billion in total employee compensation and benefits from 2002 to 2007:
- Goldman Sachs
- Morgan Stanley
- Merrill Lynch
- Lehman Brothers
- Bear Stearns
Thus, while CEO pay grabs the headlines, there are a lot more people in these firms earning large sums that can exceed what CEOs get in other industries. A veteran business unit controller at Merrill Lynch once quipped that Wall Street firms resemble employee benefit trusts, given the large percentages of revenue paid out as compensation (often in excess of 50%). It is likely that such handsome payouts may be a thing of the past, since firms like Merrill Lynch (plus the remnants of Lehman and Bear Stearns) have fallen under the control of lower-paying banks.
The move by Goldman Sachs will put enormous pressure on other financial firms to follow suit, especially those that have accepted federal equity infusions. This news only reinforces the likelihood that a radical downsizing of compensation plans is in the offing for the financial industry, and that it will be a long-term trend.
Base Pay Increases to Offset Bonus Cuts: In May 2009, some financial services firms began responding to the political flak over bonuses by significantly raising the base pay of senior executives. Morgan Stanley is the first to do so, with increases of over 100% for certain key personnel. 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.
These actions mirror the events of 1993. Then Congress, at the urging of the Clinton administration, raised tax rates and limited the tax deductibility of executive pay in excess of $1 million. This resulted in 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.
