Public outrage has boiled over as billions of dollars in bonuses have been handed out on Wall Street, the center of the 2008 financial storm that contributed to the worst recession in generations and left millions of people jobless.
Even President Barack Obama joined in, labeling the $18.4 billion in bonuses “shameful” and calling on Wall Street to “show some restraint.” Seizing on the populist anger, lawmakers put together a compensation-reform bill that passed the House of Representatives on July 31 and will be brought to a vote in the Senate after the summer recess.
Still, despite all the apparent momentum building to rein in runaway pay, it looks as if Wall Street’s compensation practices will largely emerge unscathed. Critics say the bill’s key proposals, though well-intentioned, are non-binding, so companies can choose to ignore them. And Wall Street executives, seemingly unconcerned about further antagonizing an already agitated mob, are gearing up to boost pay. Some top firms that just last year received billions in government bailout money are thriving again and appear undaunted by the widespread criticism of big paychecks. Consider:
• Flush from two quarters of profits and having repaid the government its bailout money, Goldman Sachs has set aside $11.36 billion for compensation and benefits in the just first six months of the year, a 33 percent increase from last year.
• JPMorgan Chase, which also has paid back taxpayer money, reported record second-quarter revenue and has carved out $14.5 billion for pay in the first half of the year, up 22 percent.
• While Morgan Stanley, too, has repaid the government, the bank recorded its third-consecutive loss in the second quarter. Despite that, the bank has set aside $6 billion so far this year for compensation expenses, and $3.87 billion just in the second quarter, which represents 72 percent of its revenue.
“The Wall Street community is not particularly plugged into the public sentiment,” says Peter Cappelli, management professor at Wharton business school. “It’s a culture that hasn’t cared very much about the political realities elsewhere.”
Officials have blamed Wall Street’s pay structure for making the financial crisis worse. Treasury Secretary Timothy Geithner said the compensation practices “encouraged excessive risk-taking.” Lured by big bonuses, increasingly large numbers of bankers took risks that led the U.S. to the brink and a $700 billion government bailout for the industry.
Wall Street banks typically set aside more for compensation than other industries — about 50 percent of revenue to pay employees. However, the largest companies that make up the S&P 500 spend less than 22 percent of revenue on all indirect costs, which includes salaries, commissions and other overhead, according to a USA TODAY analysis of data from Standard & Poor’s Capital IQ.
Bankers say they have to pay more to retain top talent. In Morgan Stanley’s annual report, it says: “In order to attract and retain qualified employees, we must compensate such employees at market levels. Typically, those levels have caused employee compensation to be our greatest expense.” The banks also say that pay is directly linked to performance and that if they don’t retain qualified employees, performance could be affected.
However, studies have found that there is little correlation between pay and performance on Wall Street, and bankers win no matter which way the market goes. On July 30, New York Attorney General Andrew Cuomo released results of a nine-month investigation of the first nine banks that received bailouts from the government’s Troubled Asset Relief Program (TARP).
His report found that banks paid out bonuses even while running at a loss, and at those that did post positive income, annual bonuses exceeded the entire year’s profit.
At Citigroup, despite the $27.68 billion in losses last year, the bank paid out $5.33 billion in bonuses, of which about 738 employees each received $1 million or more.
JPMorgan earned $5.6 billion in the year and paid out $8.69 billion in bonuses.
The bank also had more seven-figure earners than any of its competitors — 1,148 employees received $1 million or more. Goldman earned $2.3 billion and paid out $4.8 billion in bonuses, with 212 employees earning $3 million or more.
Cuomo says his analysis makes it clear that “there is no clear rhyme or reason to the way banks compensate and reward their employees.
Compensation for bank employees has become unmoored from the banks’ financial performance.”
Throughout this year, there have been plenty of other revelations about Wall Street excesses. One example that only seemed to get uglier as more details emerged was what happened at Merrill Lynch before and after it was forced to sell itself to Bank of America to avoid collapse.
In the final three months of 2008, as BofA was trying to close the purchase, Merrill lost $15.3 billion — bringing its losses for all of 2008 to a record $27 billion. Yet, Merrill CEO John Thain pushed through $3.6 billion in bonuses to Merrill employees days before the merger with BofA closed on Jan. 1, 2009. The merger cost American taxpayers $20 billion in cash and an agreement by the government to share in losses that totaled $118 billion.
Even as Wall Street is increasing its compensation and lawmakers are criticizing it for doing so, Washington, too, seems to be shying away from imposing harsh curbs on pay.
The key reason is that lawmakers are fearful that tough pay curbs might get in the way of the financial services industry helping foster an economic recovery.
“It is a nightmare situation — nobody wants these firms to fail, which would lead to a bigger economic and political disaster; on the other hand it’s embarrassing that they are already deciding to pay themselves more for doing well,” says Alan Johnson of compensation consultant Johnson Associates.
Critics say the compensation-reform bill lacks teeth. Sponsored by Rep. Barney Frank, D-Mass., the Corporate and Financial Institution Compensation Fairness Act of 2009 has provisions that affect all publicly traded companies.
