Pay Rebounding to 2007? In Your Dreams
Wall Street bonus prospects - while buoyed somewhat by banks' first-quarter earnings - are a long way from revisiting the record levels of two years ago, a prominent compensation consultant says.
"It looks like pay will be up in 2009. I think it's extremely unlikely that it would approach 2007," declares Alan Johnson, managing director of Johnson Associates Inc.
Sunday's New York Times prominently featured an article asserting workers at the largest financial institutions "are on track to earn as much money this year as they did before the financial crisis began, because of the strong start of the year for bank profits."
Akin to 'UFO Sightings
That claim is every bit as unfounded, indeed silly, as it sounds at first blush, Johnson and other industry experts tell eFinancialCareers News. "The view that we're back to 2007 is just tabloid journalism," says Johnson. "That story belongs right next to an article about UFO sightings, and stories about 40-foot alligators in the sewers."
Jay Gaines, chief executive of an executive search firm that bears his name, says, "I think the article is premature and overstated...The press often gets this wrong."
The Times drew its conclusion from amounts that six large banks set aside for compensation and benefits expense within their first-quarter financial statements. The paper averaged those reported figures over each institution's remaining employees, and extrapolated the quarterly figures over a full year.
Errors and Omissions
What's wrong with the newspaper's method? Start with the obvious: A single quarter can't be assumed to predict the full year. And experts cite three reasons this past quarter was special:
- The urgency bank managements feel to repay bailout (TARP) money they began receiving from the government late last year.
- Unusually large portions of compensation were deferred from 2008 into this year's first quarter.
- Some institutions posted gains by reversing previously reported losses when re-valuing certain assets.
Earnings Presage Flight From TARP
Banks' the desire to repay Troubled Asset Relief Program (TARP) aid looms large, according to Johnson. Reporting strong results early in 2009 eases the way for firms to repay the government and thereby sidestep related restrictions on compensation and business spending. "These firms have gone public that they want to get out of TARP," observes Johnson. "And to get out of TARP, you've got to have good financials."
While the first-quarter profits most banks reported do suggest conditions are improving, Johnson sees no indication that either profits or compensation will rebound to 2007 levels, or that the next three quarters will be as good for Wall Street as the first quarter.
Using a medical analogy, he says, "The industry's come off life support, and now we've got a bad cold or pneumonia. But it looks like we're going to make it."
An investment banking headhunter states the case more bluntly: "Much of the banks' recent performance was illusory."