Surely A Large Human
Date registered: Jun 2006
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Location: Between Earth and Mars
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Securities Firms Tackle Pay Issue
Limits on Compensation Are Considered to Head Off a Public Outcry
By RANDALL SMITH, AARON LUCCHETTI and SUSANNE CRAIG
In a sign that Wall Street is waking up to the political tempest over billions of dollars in year-end bonuses likely to be paid out at securities firms lining up for government infusions, top executives are in discussions to possibly cap their own compensation, according to people familiar with the situation.
While the discussions remain fluid and many details still must be agreed to, the talks underscore an emerging consensus among some of the securities industry's most powerful executives that the escalating pay controversy is creating yet another public-relations mess for Wall Street.
"There are going to be some people in the financial-services industry who will show real leadership here and recognize the reality of the situation," one senior Wall Street official said.
At least one major firm has looked at former PepsiCo Inc. Chairman and Chief Executive Roger Enrico's move in 1998 to give up his $900,000 salary. Instead, Mr. Enrico asked PepsiCo directors to fund scholarships for children of "frontline employees." Mr. Enrico still got a $1.8 million bonus that year.
And as Wall Street firms examine their pay and bonuses, distinctions are being made between the highest-ranking executives and lower-level traders and investment bankers who aren't widely known beyond Wall Street but could get plucked away by rival firms if compensation practices are significantly altered.
As a result, the most likely scenario in the firm-by-firm discussions is a sharp decline in compensation for chief executive officers, but fewer changes in how bonuses are paid to most employees, according to a person familiar with the matter.
Since the start of 2002, Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Bear Stearns Cos. have paid a total of $312 billion in compensation and benefits. Bonuses generally account for about 60% of total Wall Street compensation, meaning that the five firms paid out an estimated $187 billion in bonuses.
The tried-and-true compensation model has come under fire since the Treasury Department announced plans to inject capital into financial institutions. Goldman, Morgan Stanley and Merrill are among the initial nine companies getting a combined $125 billion in government capital, fueling worries that taxpayer funds will be used to essentially subsidize Wall Street bonuses.
"To the guy in Kansas making 60 grand a year and losing his house, it seems like madness to bail out firms at a favorable interest rate and see them have thousands of people making millions of dollars a year -- and it is madness," said Alan Johnson, a New York compensation consultant.
Part of the problem for Wall Street is that some politicians contend that executives and employees responsible for fueling the credit crisis should now pay a steep penalty, especially since huge profits during the housing boom are being swept away by losses and write-downs. Since the start of 2007, for example, Merrill has had net losses of nearly $20 billion -- or nearly all of the profits made by the company from 2003 to 2006.
Now that Merrill is being sold to Bank of America Corp., thousands of Merrill employees are facing the ax as part of plans to save $7 billion in pretax annual costs at the combined company.
While top Merrill executives are sensitive about the appearance of big pay packages, they also believe the acquisition that they engineered saved the company, meaning that they should be rewarded.
Overall, top Wall Street executives who might have earned $30 million last year could see their pay plummet to $8 million this year, predicts Mr. Johnson, the compensation consultant. Most of that is likely to come in the form of restricted stock with little or no cash. Other pay experts predict Wall Street bonuses will decline an average of 40% to 45% from last year, reflecting sharply lower revenue and profits.
At Goldman and Morgan Stanley, the two remaining major independent securities firms, compensation and benefits for the first three fiscal quarters fell 32% and 20%, respectively.
That period ended before the stock market plunged in September and October, Lehman filed for bankruptcy and the federal government mounted a series of rescue efforts propping up a slew of financial firms and markets.
Historically, Wall Street firms have tied the pay of top executives to the firm's overall profitability. Last year, Goldman CEO Lloyd Blankfein earned $69 million, up 28% from fiscal 2006. Many Wall Street executives expect Goldman to set the overall tone for the next round of year-end bonuses.
Morgan Stanley CEO John Mack took no bonus for 2007, reflecting the firm's $3.6 billion quarterly loss from errant mortgage trades. Senior Morgan Stanley executives have recently been discussing this year's pay and bonuses, but no decisions have been made, one person familiar with the situation said.
The wide-ranging pay talks follow demands for information about compensation plans. Some firms have considered hiring one outside law firm to represent the nine companies on the Treasury Department's initial list of capital recipients in their response to this week's demands by New York Attorney General Andrew Cuomo. Top traders, who can out-earn CEOs in a good year, are concerned about possible disclosure of their names and pay.
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