Bonuses: Morgan Stanley’s bankers shouldn’t be surprised their bonuses may be cut by as much as 25 per cent. The firm has hardly kept it secret. Compared to the first nine months of 2009, it has set aside 14 per cent less in compensation and benefits for its investment bankers and traders this year, after stripping out the UK bonus tax. Even the most resilient survivors of the financial crisis – including Goldman Sachs, Credit Suisse and JPMorgan – are in similar straits. But those who failed to spot that rather crucial bit of public information have no reason to rise up in protest.
After all, it’s hardly been a banner year for Wall Street. Trading revenue, which provides most of the earnings fuel at large firms, has fallen. Morgan Stanley may appear to have raked in a third more so far this year. But add back last year’s $4.9-billion hit on accounting writedowns on the bank’s own liabilities and revenue fell almost 12 per cent. Goldman’s top line fell 15 per cent, and JPMorgan’s investment bank was 8 per cent lower. Both have trimmed their compensation pools by at least that amount.
Falling revenue has helped push returns on equity down to around 13 per cent at Goldman and JPMorgan, a level which barely covers the cost of capital. Morgan Stanley’s return is even lower. So, cutting bonuses is hardly controversial — it’s how the incentive performance system of Wall Street is supposed to work.
What’s more, many investment banks, including Morgan Stanley, as much as doubled base salaries in the middle of last year, in part as a pre-emptive move in case Congress imposed a bonus tax. That should provide some insulation against any drop in incentive payments for the lower echelons of Wall Street – and may explain why the rumoured bonus cuts are larger than the overall dip in compensation.
Big hitters won’t be so easily appeased, of course: The extra $200,000, say, from doubling a base salary won’t match a 25 per cent drop in bonus for those used to taking home $2 million or more a year. Of course, the big rainmakers – and those in areas where the firms are expanding their presence such as in emerging markets – ought to make out well anyway. As for the others, if they cannot do the basic math on earnings, shareholder returns and compensation, they probably shouldn’t be on Wall Street.
