BOSTON Jan 17 In the past few days, major
global banks have taken the axe to pay with unusual zeal.
JPMorgan Chase & Co slashed the compensation of CEO
Jamie Dimon, one of the world's top bankers, by half despite
record earnings in 2012. His crime? Being in charge when an
investment unit ran amok with the botched "London whale"
derivative trades that cost the bank more than $6.2 billion.
Goldman Sachs Group Inc, which is known for handing
out some of the most lucrative pay packages on Wall Street, paid
just 37 percent of its 2012 adjusted revenue to employees - the
second-lowest proportion since the Wall Street firm went public
Earlier this week, sources said Barclays Plc and
Deutsche Bank AG plan to cut banker pay by up to 20
percent, while Morgan Stanley took the unusual step of
deferring 100 percent of 2012 bonuses for high-earning
Morgan Stanley bankers and traders got word directly from
their managers on Thursday, which one employee characterized as
"bonus day, if you can even call it that anymore."
Wall Street employees might have to get used to that.
Investors and analysts believe lower compensation is here to
stay for some time as firms face unprecedented challenges, in
some cases forcing them to fundamentally rethink how they
operate. New regulations make many businesses on Wall Street
less profitable and sometimes even impossible.
With tens of thousands of jobs shed in the past few years,
bankers and traders have trouble demanding more money. Banks are
also replacing employees with automated systems in areas such as
bond trading, which reduces staffing.
"I hate this phrase, but I think their compensation levels
at this point are the new normal," said Michael Cohn, chief
investment strategist at Atlantis Asset Management, which owns
Goldman Sachs shares. "The world isn't going back to the way it
was anytime soon."
If Wall Street employees are the losers from these pay
changes, there are some winners, as well.
"It's a good trend for the stocks and for investors," said
Mark Morgan, senior analyst at Thrivent Asset Management, which
oversees more than $80 billion in assets.
Less money for employees means more for shareholders.
"It's tougher to justify the expense if revenues aren't
there," Morgan added.
Oppenheimer analyst Chris Kotowski called Goldman a
"textbook example" of how banks can boost profitability even in
a difficult business environment by cutting employee pay.
"It is simply not an option for bank managements to earn
non-competitive returns in the long run," he said.
Goldman's return on equity for the quarter - a measure of
how well the bank turns shareholder funds into profit - was 16.5
percent, nearly triple its level in the same quarter a year
However, there are some skeptics who say it is too early to
declare the arrival of a new era when it comes to Wall Street
pay. After all, they point out, banks are only taking drastic
steps after punishing investors with weak returns for the past
few years. If business really starts to pick up, they expect fat
paychecks to return.
Senator Bernie Sanders, one of Wall Street's most vocal
critics, said the boards might be more receptive to criticism in
the short term.
"There is an extraordinary amount of anger at Wall Street;
much more so I think than inside-the-beltway pundits perceive,"
said the senator, who is an Independent from Vermont. "I think
maybe some of the boards there are beginning to catch on to
But once that anger died down, he expected Wall Street
compensation to go right back up.
The steady decline in pay in large part follows demands from
bank shareholders, who were increasingly exasperated with high
pay levels that continued for years after the financial crisis
and ate up shrinking revenue.
Reuters reported in October that top shareholders meeting
with Morgan Stanley executives in 2011 had demanded to know why
the bank could not cut compensation to just 30 percent of
revenue from current levels above 40 percent.
Yet some observers point out there is not much sympathy for
Wall Street, where pay packages for mid-level employees can run
well into the six figures. That is still multiples higher than
what the average U.S. worker earns.
"In the end, this is still going to be the most highly paid
industry in finance," said Brad Hintz, a former Morgan Stanley
treasurer who analyzes brokerage stocks for Bernstein Research.
"And so, no one is going to be crying over Goldman partners
selling apples on the street corners."