Goldman Sachs Group Inc, Morgan Stanley and JPMorgan Chase and Co’s investment bank, survivors of the worst financial crisis since the Great Depression, are set to pay record bonuses this year.
The firms — the three biggest banks to exit the Troubled Asset Relief Program — will hand out US$29.7 billion in bonuses, analysts’ forecast. That’s up 60 percent from last year and more than the previous high of US$26.8 billion in 2007. The money, split among 119,000 employees, equals US$250,400 each, almost five times the US$50,303 median household income in the US last year, data compiled by Bloomberg show.
The three will award more in stock and defer more cash payments under pressure from regulators to tie pay to long-term results, compensation experts said. They may still face public wrath over the size of bonuses after the government injected capital into all the major financial institutions following Lehman Brothers Holdings Inc’s collapse in September last year.
“Wall Street is beginning to resemble Clark Gable as Rhett Butler in the film Gone With the Wind: ‘Quite frankly, my dear, I don’t give a damn,’” Paul Hodgson, a senior research associate on compensation at the Portland, Maine-based Corporate Library, said in an e-mail. “It doesn’t seem as if even political threat, disastrous PR, envy, rising unemployment rates and home repossessions is enough to get any of these people to refuse the bonuses they have ‘earned.’”
Bonuses for employees in fixed income will likely jump the most, 40 percent to 45 percent, while employees in asset management may see no growth in their year-end bonuses, said a report from Options Group, a New York-based executive search and compensation consultant firm.
Average bonuses for employees at financial firms worldwide will rise about 35 percent to 40 percent this year, said the annual report, which is set to be released this week. They will still remain below 2007 levels after dropping an average of 40 percent to 45 percent last year, the report said.
Managing directors in high-yield credit sales are expected to see some of the biggest average increase in bonuses, a 50 percent jump to a range of US$1.3 million to US$1.7 million. The bonuses of directors in commodity sales units may also climb 50 percent to a range of US$650,000 to US$850,000, the report said. Managing directors in commodities trading will receive the largest bonuses, an average of US$4 million to US$6 million each.
The report didn’t break out bonuses from total compensation for positions above managing director.
Morgan Stanley is among banks that are offering a bigger portion of bonuses in stock and instituting so-called clawback clauses to tie incentive pay to risk, the report said. JPMorgan and UBS AG are also raising base salaries for some employees to reduce the share of bonuses in total pay.
“Wall Street is all about creating wealth, and when banks start making money again, they have to pay their people,” said Michael Karp, co-founder of Options Group. “But because there’s so much public scrutiny, people will be very sensitive in terms of putting caps on some of these cash figures, and you’ll see a lot more in stock.”
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 their shareholders that they set aside US$36.4 billion for compensation, up 27 percent from the same period a year earlier.
The three New York-based firms will likely set aside US$49.5 billion for compensation for the full year, showed estimates from David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller in New York. That’s up from US$30.9 billion last year and US$44.7 billion in 2007.
The rise in compensation is led by Goldman Sachs, which had record profit in the second quarter. Its compensation expense is expected to more than double from last year to US$21.9 billion, or about US$691,000 per employee, according to Trone’s estimates. The expense at JPMorgan’s investment bank is expected to jump 55 percent to US$12 billion, about US$482,400 for each employee, while Morgan Stanley’s compensation cost will rise 27 percent to US$15.6 billion, or US$252,000.
Year-end bonuses usually account for about 60 percent of compensation, the Options Group report said. While the total this year is expected to be greater than in 2007, it will come to less per employee than the US$256,000 paid out that year by the three firms because of increased staffing.
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