TOPICS > Economy

Bonuses Shrink as Wall Street Reacts to Crawling Economy

January 17, 2012 at 12:00 AM EST
As members of the Occupy movement sought answers on Capital Hill Tuesday, reports also circulated that bonuses on Wall Street will be lower this year. Judy Woodruff discusses what the declining dollars mean with financial writer William Cohan and compensation consultant Brian Foley.
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JUDY WOODRUFF: Now, to the continuing anger over Wall Street pay in light of the slow economic recovery.

It’s an issue that has often been front and center since the government bailed out big banks and other firms in 2008 and 2009. It has also helped fuel some of the Occupy protests in New York and around the country.

Today, more than 500 members of the Occupy movement took their messages to Capitol Hill, where they raised questions again about the role of corporations and inequality.

Here’s some of what they told us. These protesters only provided their first names.

ABA, Occupy Congress: We have to come up with different ways of creating a system and a mechanism that will allow people to put forward their best work and to have it represented fairly. And as soon as the people in the Congress start hearing that message from the people, until their voices get louder and louder and they cannot ignore it, then they will get it.

JAMES, Occupy Congress: I have been active in causes in years past. And I had given up on any substantial change in this country until the Occupation. Nothing like this has happened before. They said the first cold night, we’d be gone. They said we wouldn’t last more than a week.

Three-and-a-half, almost four months later, here we are. We’re not going anywhere. I have never met a group of more committed, dedicated people fighting for real change.

JUDY WOODRUFF: This all comes as Wall Street firms are in the midst of bonus season. Bonuses are reportedly lower this year, perhaps as much as 30 percent lower, in some cases.

Today, The Wall Street Journal and The Financial Times both reported that Morgan Stanley would limit its cash bonuses to $125,000 and defer some compensation to 2012. We look at this with William Cohan, author of “The House of Cards,” a book about the collapse of Bear Stearns. He once worked as a managing director at J.P. Morgan Chase. And Brian Foley, a compensation consultant who works with Fortune 500 firms, including financial service firms and executives at those firms.

For the record, we called the industry’s trade group, but they declined our invitation.

Gentlemen, welcome to you both.

William Cohan, to you first.

These early reports that bonuses are dropping, how widespread is this? And why do you think it’s happening?

WILLIAM COHAN, financial writer: Well, I think it’s very widespread, Judy.

When you have an industry leader like Morgan Stanley capping out their what seems to most people like a lot of money, but to Wall Street types unfortunately not, capping out their cash pay at $125,000, that becomes an industry standard and the kind of benchmark that other people hit, because, as we well know, the industry uses consultants to measure what everyone else is doing and doesn’t want to be seen as paying too much more or too much little — littler than everybody else.

This is happening because revenues are down on Wall Street, profits are down on Wall Street. We’re entering into a new paradigm shift on Wall Street. And this is one of the fallouts from that.

JUDY WOODRUFF: Well, Brian Foley, why do you think it’s coming down?

BRIAN FOLEY, executive compensation consultant: I would say first, it’s all about revenues and net profits. Those are both down dramatically.

And when they’re down, every expectation is that the bonus numbers will be down. The Morgan Stanley story is actually a little more than we talked about, because the top of the house, the top 10, 12, 15 guys, are getting no cash bonuses at all, and everything is deferred. So I think that lays down a very interesting challenge to the rest of the Street as to what they’re going to do in terms of how — the form in which their bonuses are going to be paid, how much is going to be immediate and how much is going to stay on the table and for how long and subject to what conditions.

JUDY WOODRUFF: Brian Foley, staying with you, so how much — I mean, give us an example of how much, say, you expect the average bonus to come down. And how does this fit into the larger pay package? I mean, are we talking about entire pay packages coming down or talking about deferring the money, putting into guaranteed salaries?

BRIAN FOLEY: Well, it will vary by firm.

I think what you’re going to have, you’re not going to have guaranteed salaries. You’re going to have — you will have a modest amount of cash bonus, a significant amount of stock. This is for more senior executives. And that stock will stay on the table for a considerable period of time.

And as you go down in the organization, there will be less by way — maybe little or no stock and it may be all cash, but there will be less cash. Looking at the pools, the — not all the numbers are in, but some of the early return numbers suggest that the overall pools may be somewhat flat.

And what you have is an allocation between those people who have been high achievers in a down year and those people who haven’t. The other thing that we haven’t talked about are layoffs. And there are reports now that the layoffs may increase substantially as the year goes on. So, that’s a second problem. It’s not just less money being paid, but people actually losing their jobs.

JUDY WOODRUFF: William Cohan, so looking at this picture that is — again, the reports just started to come in. Are these appropriate reductions you’re seeing? Are there — and in your mind as you have been telling us today, you still think some of these amounts that are being paid are excessive. Tell us why.

WILLIAM COHAN: Judy, Wall Street has always paid itself excessively, basically from the origin of the phenomenon of Wall Street.

Wall Street bankers, when they were partners of their own firms, generally got paid much more than the common person on the street and always lived much, much better. So this is a phenomenon that’s been going on for well over 100 years.

What’s been happening, unfortunately, for the last 40 years, since Wall Street firms started going public — and once upon time when they were all private partnerships, it was all their own money at risk. And if they made a lot of money and they took that out as their own profit, you know God bless them.

But what’s happened in the last 40 years, since these firms started going public, and now all the firms on Wall Street are public, is their incentive is to take big risks with other people’s money and to pay themselves huge bonuses based on the revenue they have generated.

There’s no other public companies on the face of the earth that pay out between 50 and 60 cents of every dollar of revenue in the form of compensation to the people who work there. So even if you cut this compensation 30 percent and put it in deferred comp and stock, et cetera, they’re still way overpaid, much more overpaid than they need to be, frankly.

JUDY WOODRUFF: Brian Foley you don’t work for these firms, one of these firms, but you do consult with them. How do they justify these big amounts, even with the reductions we’re seeing right now?

BRIAN FOLEY: Well, let me take on a fact or two first.

I understand the reference to 50 to 60 percent, but that’s not what it is anymore. At some of the firms now, it’s down to 45 and 40, and some even less than 40 percent. So there is a right-sizing that has been going on. Have firms been — has every firm been aggressive as it should have been to pull the numbers back? No.

But there are firms that have made significant strides to get their spend down as a percentage of revenues. They’ve also. . .

WILLIAM COHAN: By the way, it’s not over yet. And we’re still going to see — not every firm has reported yet. I guarantee you there will be firms up in the 50 and 60 percent range, but anyway. . .

BRIAN FOLEY: Well, we’ll see. The consensus projections that I have seen would have — looking at revenues’ net of interest expense would have 45 percent for the major firms being about the top.

But we’ll see. We will also see how much is in cash and how much is in stock. I think that this is a situation now where firms need to be more conscious of how they spend the money and where they spend the money, and to make sure that on behalf of the shareholders, they get their money’s worth by keeping money on the table to assure that there is multiyear performance that warrants the payouts in question.

And that’s been a problem in the past, but I think we’re moving away from that.

JUDY WOODRUFF: Okay.

Brian Foley, just very quickly, you’re saying they’re right-sizing. It’s still a lot of money. How do these companies justify it?

BRIAN FOLEY: It’s still a lot of money. They will justify — the normal justification is, we need to do this to retain people.

And in some periods, that’s an easier argument to make than in other periods. Right now, most of the Street’s going through a tough time. So there isn’t necessarily a place to go if you decide to pick up your sticks and leave.

JUDY WOODRUFF: William Cohan, what about that as a justification for what they’re doing?

WILLIAM COHAN: Well, I think Brian’s absolutely right. That is the justification.

Unfortunately, it couldn’t be further from the truth anymore. I think some of these top executives of Wall Street firms like Lloyd Blankfein at Goldman Sachs or Jamie Dimon at J.P. Morgan Chase need to show real leadership at this moment and cut back the pay that people make, so that these firms are more shareholder-friendly.

These firms exist for the benefit of shareholders — or they should — and they haven’t. They’ve existed for the benefit of the people who work there, which is why people get paid so much. So I think the time has come to reflect the reality and tap into the Zeitgeist in America now and cut the compensation for people on Wall Street. They’re not going to go anywhere. They still get paid more there than they could doing almost anything else.

JUDY WOODRUFF: Strong views. And, gentlemen, we are going to leave it there for now.

William Cohan, we thank you. Brian Foley — thank you both.

WILLIAM COHAN: Thank you.

BRIAN FOLEY: Thank you.