Goldman Sachs Group Inc., which set Wall Street pay records when stocks surged and cheap credit abounded in 2007, is again leading the industry as markets boom anew: By putting aside less money for employees and more for shareholders.
Goldman Sachs, along with the investment-banking divisions of six of its biggest U.S. and European rivals, allocated a collective 39% of revenue for
compensation in the first nine months, down from 42% a year earlier and the 50% some firms earmarked before the financial crisis. Goldman Sachs's 41% ratio so far this year is its lowest nine-month figure as a public company.
Rising revenue at many banks is stoking employees' hopes for larger bonuses to make up for the cuts in year-end payouts in the wake of the financial crisis and the switch to awards of restricted stock, which vests over time. Firms instead are preparing to shrink compensation for individuals amid investor pressure to improve return on equity. The measure of profitability stands at 10% or lower at each of the five biggest Wall Street banks — less than half the levels that preceded the credit crisis.
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“Someone's going to be disappointed,” said Joe Jolson, co-founder and chief executive officer of investment bank JMP Group Inc. It either will be “bankers that haven't really been paid any real cash bonuses for five years, or the shareholders of these companies.”
BONUS OPTIMISM
Goldman Sachs has boosted its quarterly dividend to 55 cents a share from 35 cents a share, a 57% increase, since the beginning of 2012. Before last year, the firm's dividend hadn't been raised since 2006.
The firm's average compensation cost per employee fell 5% to $319,755 in the first nine months of 2013. At JPMorgan Chase & Co.'s investment bank, it fell 4.8% to $165,774. The figure plummeted 16% at Credit Suisse Group AG to $204,000.
More than half of bank employees expect bigger awards this year than last, according to a survey conducted by eFinancialCareers.com. The September poll drew 4,642 respondents in the U.S., U.K., Germany, Singapore, Hong Kong, Australia and the Middle East.
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As banks divide up compensation pools, pay will diverge more than usual among businesses and workers, said Robert Dicks, a principal at Deloitte Consulting who focuses on compensation and benefits at financial services firms. Companies seeking to shrink their pool can reward star bankers only by taking from other staff members, he said.
“Banks continue to play this balancing act between telling shareholders and the public that overall pay is moderating, and it is, while maintaining a focus for employees who are highly successful or in highly profitable areas,” he said. “The mathematics of that is somebody is getting squeezed.”
Investment banking revenue at the five biggest U.S. firms — Goldman Sachs, Morgan Stanley, JPMorgan, Bank of America Corp. and Citigroup Inc. — rose 16% in the first nine months, while equity trading revenue climbed 9%, according to data compiled by Bloomberg. Fixed-income trading fell 11%.
Firms benefited from a 16% increase in the value of initial public offerings globally and a 34% surge in offerings of high-yield bonds during the year's first nine months. U.S. stocks surged, with the S&P 500 climbing 18% and reaching record highs.
“People's expectations go up a lot when their business goes up,” said Mr. Jolson, whose firm increased head count to 231 as of Sept. 30, from 217 a year earlier, and set aside 24% more to cover pay costs. “Revenue production is up, and they expect to be paid.”
'DIVERGENT' PAY
Bonuses for equity traders and investment bankers probably will rise, offset by a drop in pay for fixed-income traders, said Michael Karp, chief executive of the recruitment firm Options Group. Rewards for equity-side employees may catch up to their fixed-income counterparts, reversing the trend of bond trading as the dominant business in recent years, he said.
Aggregate compensation for the industry may rise for the year as banks hired more compliance and legal staff and as lower-tier firms boost pay, Mr. Karp said. That won't translate to bigger bonus checks for the average worker at major banks.
“In general, people are expecting to get paid more than last year, but that's not going to be the case,” he said. “It really depends on what area you're in. Within firms, pay is going to be very divergent within groups.”
Senior employees who don't generate revenue will be among those targeted for pay cuts, Mr. Dicks said. Banks' top managers in corporate roles such as human resources and information technology historically earned more than their peers in other industries, he said. That gap is disappearing as banks are forced to rein in costs, he said.
Total pay for top bankers and traders in 2012 was about half that of 2007, according to an Options Group report last year. After markets tumbled in 2008, Wall Street drew criticism from investors, lawmakers, regulators and even its own leaders for rewarding employees too lavishly during market bubbles.
Former Goldman Sachs chairman and CEO Henry Paulson, who was paid an $18.7 million cash bonus for his final six months of work on Wall Street in 2006, has said the industry bailouts he later orchestrated as U.S. Treasury secretary should encourage firms to exercise restraint.
“During benign periods, I think compensation levels on Wall Street are out of whack,” Mr. Paulson said in a 2010 interview conducted by billionaire Warren E. Buffett. “Restraint is very much in order by the top people.”
SHAREHOLDER PAYOUTS
Goldman Sachs, Morgan Stanley and JPMorgan's investment bank collectively reduced staff last year, allowing them to boost pay per employee even as the pool of money shrank. The three investment banks have reduced collective head count by 337 this year through September, compared with 6,920 cuts in 2012.
With profitability remaining below pre-crisis levels, companies are seeking to return more capital to shareholders. The five banks paid out $12 billion through dividends and stock buybacks in the first half of this year and already have surpassed their $13 billion total for all of 2012.
The moves helped drive the companies' stocks higher. Morgan Stanley climbed 52% this year through last Tuesday, while Goldman Sachs and Citigroup rose 27% and 26% respectively. Bank of America advanced 22% and JPMorgan 20%.
Bonus expectations in the U.S. may have been tempered by the government shutdown this month and its impact on the economic recovery. As congressional budget talks deadlocked in September, U.S. employees expressed less optimism than colleagues abroad, with only 42% predicting their bonus would rise, the eFinancialCareers.com survey showed.
GOLDMAN'S SURPRISE
New York State Comptroller Thomas DiNapoli said in an Oct. 22 report that the turmoil in Washington may hurt fourth-quarter profits and crimp bonuses this year.
Morgan Stanley's institutional securities group cut its compensation-to-revenue ratio to 42% in this year's first nine months, down from 46% a year earlier, excluding certain accounting charges. JPMorgan's corporate and investment bank pared its ratio to 31%, from 34%.
Goldman Sachs's 41% surprised analysts by dropping below the 43% it had allocated in this year's first half. Chief financial officer Harvey Schwartz indicated the firm could further reduce the ratio, which was 44% in 2012's first nine months and ended that year at 38%.
“We'll look at all the components: competitive dynamic, performance and, of course, shareholders and [return on equity],” Mr. Schwartz said on a conference call with analysts earlier this month.
Credit Suisse cut compensation costs at its investment bank by 17% in the first nine months of the year, while UBS AG reduced its investment bank personnel expenses by 7%, even as revenue jumped 22%. Deutsche Bank AG cut its pay pool for bankers and traders by 13%, while Barclays PLC's investment bank compensation fell 4%.
Citigroup, which doesn't break out those costs for its divisions, said total expenses in its investment bank were down 3% from a year earlier, driven by job cuts and “lower performance-based compensation.” Bank of America, which also doesn't detail pay costs, has done a “good job” of keeping expenses in check in its trading unit, CFO Bruce Thompson said this month.
(Bloomberg News)
