Our Take: Where Bonus Forecasts Come From
The past month has produced an outpouring of reports about banks' expected year-end payouts to employees. Although I suspect very few eFinancialCareers users depend on the news media when assessing your own bonus prospects, it can't hurt to be informed what goes into the sausage-vat that spews headlines like "Wall Street's Bonus Babies" and "Wall Street's Bonus Army Pulls Bank Robbery."
At a minimum, you'll be better positioned to answer Aunt Lucy the librarian or Cousin Marcus the bartender, should they attempt to lecture you about "greed" around the Thanksgiving table a few weeks hence.
Contrary to popular opinion, Wall Street firms don't actually publish their bonus decisions - not even company-wide totals. Ergo, there are no official bonus numbers or "announcements." Most published "bonus pool" numbers - even those compiled after bonuses have been paid out - are estimates.
The exception is New York State Attorney General Andrew Cuomo. Using subpoena power and working alongside congressional investigators, Cuomo forced the largest financial institutions that received U.S. bailout aid to turn over closely guarded compensation records for 2008. His final report issued in July disclosed company-by-company bonus totals and how they were divvied up within each firm (without naming individuals). For instance, Morgan Stanley paid a total of $4.475 billion in bonuses with 428 individuals receiving $1 million or more. The nine biggest bailout recipients paid a combined $32.6 billion.
Other Data Sources
The New York State Comptroller's office publishes an industry-wide bonus pool estimate early each year. It's based on personal income tax collections and other factors, including industry revenue and expense trends. Those figures, widely quoted in the media, are limited to bonuses paid to securities industry employees within New York City. Last February Wall Street Journal columnist Carl Bialik analyzed the comptroller's underlying assumptions and concluded that his $18.4 billion estimate probably far understated Wall Street's actual 2008 bonus pie.
News organizations often publish their own estimates of Wall Street bonus totals. Typically these computations tote up compensation and benefits expense figures reported by each bank and then multiply the total by some fraction, usually around 50 percent.
Compensation consultants also issue bonus projections. Johnson Associates publishes detailed updates each quarter, broken out by business segment. But its forecasts don't show dollar amounts or bonus as a percent of salary. Instead, Johnson's figures are stated as expected percentage change for the average employee bonus within each business area, compared with last year.
A Widely Cited 'Bonus' Number That Isn't
And here's a curve ball to watch for, and perhaps neutralize Aunt Lucy. One number bandied about as a "bonus pool" lately actually represents something quite different: company-wide total compensation plus benefits.
Discussing Goldman Sachs' latest financial results, the New York Times' Joe Nocera wrote: "People were fixated on the $5.3 billion the firm had set aside for its executives' year-end bonuses. Added to first and second quarter set-asides of $4.6 billion and $6.6 billion, the firm had put aside $16 billion so far this year for employee bonuses."
Here is what those numbers really denote: Company-wide compensation and benefits expenses (including salaries, estimated year-end discretionary compensation, amortization of equity awards, and other items such as payroll taxes, severance costs and benefits). That definition comes straight off page 3 of Goldman's third-quarter earnings announcement.
So, Nocera can't be bothered to distinguish between "executives' year-end bonuses," and the combined salaries, bonuses, payroll taxes and benefits of the firm's 31,700 employees. Not while he's having a go at Goldman Sachs, anyway.
Anatomy of A Meme
Nowadays no one is shocked to find major factual errors cropping up in prestigious mainstream news organs. I'm old enough to remember the time when such extreme carelessness often carried career consequences for the reporter who put his name to it. Even back then, though, editors would tolerate loaded words or dubious information when deployed against a "legitimate" target - a person, group or nation the publication's audience hated. That may be what's going on here.
And here's one who should definitely know better. Famed global investor Jeremy Grantham, in his latest quarterly letter to clients of his firm, GMO LLC, wrote in reference to Goldman: "It is now estimated that this year's bonus pool will be plus or minus $23 billion, the largest ever."
Whatever you may think of Goldman Sachs, ask yourself this: Can you honestly expect the "shame on you bankers" crowd to exhibit any more respect for truth, when they take aim at your employer's compensation decisions?