Goldman upping the ante for rivals on bonuses

By Steve Eder - Analysis

NEW YORK (Reuters) - Bankers and traders, no matter where they work, might have Goldman Sachs Group Inc to thank for heftier bonuses this year.

As Goldman Sachs rakes in record earnings, it continues to give employees $1 for every $2 it takes in. So far this year, Goldman has set aside $11.3 billion for compensation, or 49 percent of its net revenues.

By maintaining that ratio, Goldman is forcing the hand of some competitors, compelling them to set aside more for payouts, even as they report narrow profits or losses.

"What they are doing is they are raising the bar and putting pressure on all of their competitors," said Brad Hintz, an analyst with Sanford C. Bernstein. "The competitors are facing a challenge."

Morgan Stanley Chief Financial Officer Colm Kelleher said during Wednesday's earnings conference call that "competitive pressures" are affecting the bank's pay levels. Morgan Stanley boosted its compensation pool even as it posted a wider-than-expected $1.26 billion loss during the second quarter.

"Obviously, everyone would like to have far more revenues to make the compensation issue easy," Kelleher said.

So far this year, Morgan Stanley has set aside $5.9 billion, or 71 percent of its net revenue, for compensation. The tab was driven up in part by expenses related to the completion of the Morgan Stanley Smith Barney joint venture and it is not adjusted for improvements in debt valuation.

During the first half of 2008, as Morgan Stanley reported profits, it set aside $6.9 billion, about 50 percent of net revenue, for compensation.

"It is always difficult when you are a little bit of the laggard," said Alan Johnson, a compensation consultant with Johnson Associates in New York City. "When things are getting better you get squeezed. You don't have as much revenue to afford compensation, but your competitors are doing better."

TARGET ON THEIR BACKS

On average, major U.S. securities firms set aside 47.6 percent of net earnings for compensation this decade, according to a research note by Sanford C. Bernstein.

Lawmakers have taken a special interest in Wall Street bonuses after last year rolling out the $700 billion Troubled Asset Relief Program, known as TARP, to aid banks.

Some major firms, including Morgan Stanley, JPMorgan Chase & Co, and Citigroup Inc, are changing the way they pay their employees, putting more emphasis on base salary and less emphasis on bonuses.

But to stay competitive, Citigroup has gone so far as to guarantee mostly cash bonuses to new hires in London as it swiped talent from rivals.

This week, JPMorgan Chase unveiled plans at a townhall meeting of investment bankers to boost base salaries of employees who earn a substantial part of their compensation in bonuses, a source familiar with the meeting said. The plan isn't designed to boost overall compensation but some see it as a bid by another major bank to be remain competitive on pay.