Wall Street Bonuses Expected To Come This Season Despite Bailout

Wednesday, November 12, 2008
Wall Street Bonuses Expected To Come This Season Despite Bailout

With the financial industry on the receiving end of a massive bailout by the government, one would assume Wall Street wouldn’t be paying out bonuses this year. Well think again.

While bonuses are expected to be down between 40% and 70%, the financial industry’s foot soldiers are expected to get their bonuses, which in some cases make up 80% of their yearly compensation.

“Even if you have tough times you’ve got a lot of people that contribute a lot,” said Allan Johnson, managing director of Johnson Associates, a New York-based compensation consulting firm. The Wall Street companies don’t want to lose or devastate the morale at the companies, he said.

News reports have surfaced that Goldman Sachs (GS: 68.17, -6.51, -8.71%) and Morgan Stanley (MS: 13.02, -1.06, -7.52%) are among the Wall Street companies that have set aside billions for bonuses. Officials at Goldman Sachs weren’t immediately available to comment. A spokesman at Morgan Stanley said the company hasn't made a final decision on bonuses yet.

Paying bonuses this year is likely to result in a lot of backlash from the average American. After all, even with bonuses down dramatically, they are still higher than the average American, who is losing his or her home, makes. Not to mention the government bailout of financial firms, which seems to change daily, is coming from taxpayer dollars. Concerns abound—rightly or wrongly--that some of the $700 billion bailout could go to pay bonuses this year.

Last month, when the bailout was first being introduced, many American were appalled that they in essence would be bailing out the fat cats on Wall Street. And while bonuses will go to high level executives it will also go to top performers that have continued to do their jobs. That distinction, however, is sure to fall on deaf ears.

“The average person does not care,” said Johnson. “These people make ten times as much as I do and I’m losing my house,” he said of what many Americans will think.

Still despite the backlash Wall Street companies can ill afford to halt bonuses.

“Wall Street is likely to pay bonuses to people unless there’s legislation that prevents them because nobody wants to be the one that doesn’t pay when others do,” said John Challenger chief executive of Challenger Gray & Christmas, the Chicago employment consulting company. “People have been expecting the bonus. If they yank that out from under people they (the Wall Street companies) lose a competitive advantage.”

Challenger pointed to the concerted effort by Wall Street banks to sell equity to the government as an example of why all the investment banks will pay bonuses this year. While the government forced the banks to participate in the program, the argument went that the companies that sold equity would have a black eye if all of the other Wall Street banks didn’t follow suit. That could happen with bonuses as well, said Challenger.

“If some banks give bonuses and others don’t the talent will flow to the good bank,” he said.

But could the government step in a legislate away bonuses? According to compensation experts it’s not out of the question—given backlash is expected to be fierce. Indeed New York Attorney General Andrew Cuomo sent a letter in late October to Citigroup (C: 10.00, -0.80, -7.40%), Bank of America (BAC: 17.57, -1.12, -5.99%), Bank of New York Mellon (BK: 29.46, -0.18, -0.60%), Goldman Sachs, JPMorgan Chase (JPM: 34.66, -1.69, -4.64%), Merrill Lynch (MER: 13.93, -0.97, -6.51%), Morgan Stanley, State Street (STT: 39.81, -2.36, -5.59%) and Wells Fargo (WFC: 28.38, -0.45, -1.56%) requesting detailed accounting of expected payments to top management during the upcoming bonus season.

The government has done “stupider things,” said Johnson of Johnson Associates. “The politicians have put themselves in a terrible spot because they have positioned this as a giveaway.” He cautioned that a move to do away with bonuses this year would basically “blow up” the financial firms.

“They don’t want to spend all that money (on the bailout) to blow up the industry at the end,” he said.

[link to www.foxbusiness.com]