Wall Street May Reduce Compensation Costs to Avoid More Outcry

By Michael J. Moore

Jan. 15 (Bloomberg) -- Wall Street firms, facing pressure from lawmakers and shareholders to rein in pay, may report smaller bonus pools because of lower fourth-quarter revenue and mounting public outrage, analysts say.

Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co.’s investment bank may hand out $27.6 billion in bonuses, according to analysts’ estimates. While that’s 49 percent higher than a year ago and more than the previous high of $26.8 billion in 2007, it’s less than some analysts expected in October.

Banks have announced plans to pay more in stock and defer cash payments to satisfy regulators’ calls to tie pay to long- term performance. They may still face public anger over the size of bonus pools after the Troubled Asset Relief Program injected capital into the major financial institutions during the crisis. President Barack Obama yesterday called bank bonuses “obscene” as he proposed a levy on as many as 50 large financial firms to recoup all the U.S. bailout money.

“They know that everyone is looking at this stuff with a microscope, and I think they know what the reaction is going to be,” said David Schmidt, a senior consultant at James F. Reda & Associates LLC, a New York-based compensation firm. “The public perception is still going to be that it’s a lot of money.”

Analysts expect JPMorgan, the second-largest U.S. bank by assets, to post a 13 percent decline in net revenue from a record $30.1 billion in the third quarter. Goldman Sachs’s revenue may drop 21 percent, and Morgan Stanley’s may fall 8 percent, according to analysts’ estimates.

Goldman Sachs Compensation

The fall in compensation costs is expected to outpace the revenue decline at Goldman Sachs, which may pay the most of the three firms. Goldman Sachs, the most profitable securities firm in Wall Street history, probably cut compensation to 25 percent of revenue in the fourth quarter, after setting aside $16.7 billion, or 47 percent, through the first nine months, Credit Suisse Group AG analyst Howard Chen wrote in a note on Jan. 4.

That would bring full-year compensation to 43 percent of revenue, the lowest proportion since Goldman Sachs went public in 1999, Chen wrote.

Lloyd Blankfein, 55, and Jamie Dimon, 53, the chief executive officers of Goldman Sachs and JPMorgan, and John Mack, 65, chairman of Morgan Stanley, 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.

“If you’d look at the history of our compensation, the compensation always correlated with the results of the firm, as it did last year,” said Blankfein, who said he is required to hold 90 percent of his shares until retirement.

Morgan Stanley Bonuses

Morgan Stanley, the second-largest securities firm before becoming a bank last year, plans to defer at least 65 percent of year-end bonuses for its top 30 executives, a person familiar with the matter said last month. One-fifth of the deferred amount will be tied to Morgan Stanley’s performance, the person said.

Goldman Sachs said last month that its top 30 executives will get year-end bonuses in stock that they can’t sell for five years. The stock vests over three years and can be repossessed if the firm determines that the executive failed to adequately analyze or raise concern about risks.

JPMorgan said in a Dec. 14 statement that it gives a “significant share” of bonuses in stock, and that compensation is based on multi-year performance periods. Senior executives must hold 75 percent of all equity awards they are granted, the firm said.

Income Statement ‘Challenge’

Payment of bonuses in stock as opposed to cash lowers the expense firms have to record on their income statements because the cost often isn’t realized until the shares vest. That may boost earnings in the quarter and allow firms to avoid topping their previous record compensation amounts.

“The move to stock is going to give them a lower number in that compensation and benefits line,” Schmidt said. “Interpreting the income statement is going to be more of a challenge now.”

Goldman Sachs and Morgan Stanley’s new pay plans, which include more stock and longer vesting periods for many employees, reduce compensation expense for a new managing director by 10 percent to 15 percent, Brad Hintz, a Sanford C. Bernstein & Co. analyst, wrote in a Dec. 15 research note.

“While the immediate financial impact is positive, the organizational impact on some sectors of the business could be significant,” Hintz wrote. “Bankers may find working for a financial boutique more attractive on a risk-adjusted basis than staying with a large bank facing regulatory uncertainty, Capitol Hill intrigue and compensation ‘clawbacks.’”

Full-Year Compensation

Goldman Sachs is facing lawsuits from a pension fund and an individual investor over its bonus plans.

Kristin Lemkau, a JPMorgan spokeswoman, declined to comment. Morgan Stanley spokesman Mark Lake and Lucas van Praag, a spokesman for Goldman Sachs, didn’t return calls for comment.

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 shareholders that they planned $36.4 billion for compensation, up 27 percent from the same period a year earlier.

The three New York-based firms may set aside $46.1 billion for full-year compensation, according to estimates from five analysts, including Macquarie Group’s David Trone, Bank of America Corp.’s Guy Moszkowski and Sandler O’Neill’s Jeff Harte.

That’s up from $30.9 billion in 2008 and $44.7 billion in 2007. Year-end bonuses usually account for about 60 percent of compensation, New York-based pay consultant Options Group said in a report.

Bank of America in Charlotte, North Carolina, and New York- based Citigroup Inc. don’t break out compensation data for their investment-banking units. Bank of America plans to cut the cash component of investment bankers’ bonuses to about 15 percent, four people familiar with matter said this week.

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net.