There aren’t many things that James Gorman, the Australian born, swagger-filled chief executive of Morgan Stanley, and the sharpest critics of the banking industry can agree about. But here is a big one.
“There’s way too much capacity and compensation is way too high,” Gorman said in an interview with the Financial Times in October. “I’m sort of sympathetic to the shareholder view that the industry is still overpaid.”
Gorman put his (or rather, his employees’) money where his mouth is. Morgan Stanley is cutting 1,600 jobs and is insisting that this year’s bonuses for high-earning employees (those making over $350,000, which at Morgan Stanley is quite a lot of people) will be deferred and paid out over three years, according to press reports this week.
New earnings announcements Wednesday morning from two of the other Wall Street titans confirm that Morgan Stanley isn’t alone in trying to rein in what it pays to bankers. JP Morgan Chase and Goldman Sachs both reported strong earnings Wednesday morning, each one blowing out analyst estimates. At Goldman, net revenues in the final three months of 2012 rose 53 percent over the same period of 2011, rising by $3.2 billion. Yet the firm’s compensation and benefits expense actually fell 11 percent over that same span, falling by $232 million. (Goldman's compensation expenses for the full year, rose, however, though only a third as quickly as its revenues).
At JP Morgan's corporate and investment bank, a division that encompasses its Wall Street dealmaking arms, compesation costs fell 3 percent in 2012 as revenue rose 1 percent.
JP Morgan also slashed pay for the most prominent banker in the country. Chief executive Jamie Dimon saw his 2012 compensation cut in half to $11.5 million, which the company attributed to the ill-fated decision to allow the “London Whale,” U.K.-based trader Bruno Iskil of the firm’s investment office, to pursue a strategy that ended up costing the bank more than $6.2 billion on failed derivative bets. “Mr. Dimon bears ultimate responsibility for the failures that led to the losses . . . and accepts responsibility,” the company said in describing the rationale for Dimon’s giant pay cut.
Here’s what all these things have in common. Wall Street is still wrestling with what its business is in a post-crisis age, and coming to the conclusion that all those armies of young dealmakers in sharp suits weren’t adding as much value as it had seemed.
For a while, the major Wall Street firms seemed a place where any smart, hard-working person from with a newly minted Ivy league undergraduate degree or M.B.A. from a top ten business school could go and make a mint. It seemed to offer some of the upside of joining risky start-up—the top performers could one day earn an eight-figure pay package—combined with the safety of signing on with one of the world’s largest companies. At top schools, the investment banks even made it easy by showing up en masse and having a rigorous, logical process for recruiting and interviews. Why spend decades clawing through middle management of a General Electric or Procter & Gamble to earn what a third-year associate makes at Lehman Brothers? Why join a no-name tech startup in Silicon Valley when you can hope for the same giant payday with less risk by going to Goldman Sachs?
But the crisis exposed some deep problems with that model. One is that much of the work those workers were doing turned out to not be a viable business model in the longer-run. There was a lot of financial innovation in the 2000s, creating all manner of collateralized debt obligations and structured investment vehicles that turned out to not be sound financial products.
In other words, many of the business lines and trading strategies that seemed to justify enormous salaries seem to have been similarly illusory. If a trading strategy earns a small return every normal year and then loses everything when a crisis comes along, it’s not really creating long term value. Instead, it’s the equivalent of betting someone every year that the Cleveland Browns won’t win the Super Bowl. You will seem to notch steady, consistent returns, with no apparent risk. But there is risk! It just hasn’t materialized yet. A surprising amount of Wall Street trading activity was exposed in the 2008 crisis as a much larger-scale, more complicated version of just that game.
Then, there is regulation. The Dodd-Frank Act is placing new limits and oversight on what the banks can do, and Basel III rules are requiring that banks around the globe hold more capital and liquidity, making them less profitable. Big banks are responding by closing some divisions—the Swiss bank UBS said last year it would shutter its 10,000 employee fixed-income, currency, and commodity business last year, for example. In a shrinking industry, the remaining banks feel less need to compete aggressively for talent by paying huge salaries and bonuses or offering perks like a car service home for anyone who works late.
Being a banker or trader at the highest levels of the financial industry is hard work, full of long hours and intense intellectual demands. But it was an aberration in the 1990s and first part of the 2000s that people on Wall Street were often awarded a multiple of what other hard-working, super-intelligent professionals, such as top lawyers and consultants, were paid. But a combination of market forces and regulation are leading banks to come to the same conclusion that many people not on Wall Street arrived at a long time ago: Maybe it’s time for a pay cut.