As financial institutions prepare to release third-quarter results and finalize spending plans for 2010, the long-simmering public debate over how to restructure compensation for traders and bankers is nearing a climax.
In the next few weeks, the Obama administration will rule on pay packages for the 100 highest-paid employees of seven big government-aided companies, including Citigroup and Bank of America. Few will be surprised if government involvement filters down to indirectly influence compensation decisions at lower levels in each firm as well.
Pressure from elected officials and an angry public isn't confined to banks that remain on taxpayer life-support. Sen. Mark Warner, D-Va., says he hopes Goldman Sachs will be "a little more sensitive to the optics " of their coming bonus decisions. Otherwise, warns the senator, "You can end up seeing a reaction on the Hill."
Earnings Reports and Bonus Projections
Look for earnings season to turn up the heat on the bonus issue. Banks are set to report another strong quarter. One recent data point: Last quarter's 20 U.S. IPOs and $5.8 billion raised were the most since the first quarter of 2008, according to PricewaterhouseCoopers. Bulge-bracket equity research directors speak openly of looking to beef up their departments by adding senior analysts to cover more stocks.
That's good news, right? Not to professional agitators in Washington, the media and Main Street. For them, upbeat profit reports are raw material for a fresh round of cheap shots against anything or anyone remotely associated with Wall Street. One statistic they'll harp on is amounts the banks accrue for compensation and benefits expense for the quarter and year to date. Reporters have historically used those numbers to estimate each company's average year-end bonus payout per employee.
In turn, politicians will seize upon the bonus estimates and - liberally applying dictionary arbitrage to mislabel settlement clerks as "executives" - will turn them into a fresh "scandal" of "greedy bankers paying themselves fat bonuses."
Don't say we didn't warn you.
Is Your Pay at Risk?
How might this affect your bonus? For many finance professionals, Washington's bark once again is likely to prove worse than its bite.
"Companies will continue to pay their employees well if there's no government restrictions," says Richard Lipstein, managing director at Boyden Global Executive Search. "I don't think Wall Street is going to keel over to the politicians' rantings and ravings. But they will deal with it."
Here's a further indication: UBS banking analyst Glenn Schorr reportedly expects Morgan Stanley's top management to "make the decision to compensate its employees in an effort to retain the enterprise value of the institution, even if there may be some headline noise" associated with a higher compensation ratio. That comes from a report Schorr issued after meeting with Morgan Stanley's CFO, according to Clusterstock.
Employees of institutions whose pay deals are being reviewed by White House pay czar Kenneth Feinberg may fare worse. Feinberg reportedly plans to require a large fraction of each firm's highest salaries to be paid in restricted stock rather than cash. His rulings are expected by the end of October. Meanwhile, the Federal Reserve also is crafting risk-based proposals for release this month that would affect the design of pay packages for tens of thousands of bankers, according to Bloomberg News. (Bonuses paid by bailed-out firms are already restricted by separate legislation and regulations adopted early this year.)
"Any time you put limits on compensation that don't impact equally on all firms, people will move from one firm to another," notes Lipstein.
Of course, U.S.-based institutions aren't the only ones under the gun. In September, HSBC, Barclays and three other big UK-based banks yielded to that government's demands to cap their bonus pools and deferred-pay awards and adopt clawback policies. And officials from the Group of 20 industrial nations agreed on compensation guidelines that include discouraging multi-year bonus guarantees, deferring half or more of bonus awards over at least three years, and allowing past pay to be clawed back if losses occur later.