On Wall Street, Compensation Is Rocketing Back to Pre-Crisis Levels
Thursday, July 23, 2009
NEW YORK, July 22 -- Wall Street's biggest banks are setting aside billions of dollars more to pay their executives and other employees just months after these firms were rescued with a taxpayer bailout, renewing questions about compensation practices in the aftermath of the financial crisis.
The recent outcry over bonuses at bailed-out firms prompted public alarm and promises of reform from financial leaders, who acknowledged that pay and bonuses should not reward risky short-term business decisions -- such as those that contributed to the meltdown -- but instead longer-term financial performance.
But Wall Street, helped by improving profits, is on track to pay employees as much as, or even more than, it did in the pre-crisis days. So far this year, the top six U.S. banks have set aside $74 billion to pay their employees, up from $60 billion in the corresponding period last year.
The increase in set-asides for employee pay has raised the ire of Washington, where lawmakers denounced financial leaders for returning to old habits and vowed to enact measures governing executive compensation.
"It strengthens our commitment to getting legislation passed," Rep. Barney Frank (D-Mass.), the chairman of the House Financial Services Committee, said in an interview Wednesday, adding that a committee vote on a bill to increase oversight of Wall Street pay has been scheduled for Tuesday. "The amounts are troubling."
Goldman Sachs caused a stir last week when it disclosed it had set aside a record $6.6 billion for compensation expenses in the most recent quarter, bringing the total for the first six months of the year to $11.4 billion. If that pace continues for the rest of the year, Goldman's employees will earn an average of about $773,000, more than double the figure last year and even exceeding the $700,000 paid in 2007.
The recent set-asides came as Goldman announced it earned a record $3.4 billion for the second quarter, positioning itself, along with J.P. Morgan Chase, as one of the strongest banks to emerge from the crisis.
But some analysts and investors had especially sharp words for Wall Street rival Morgan Stanley, which reported Wednesday that it had set aside $6 billion so far this year for compensation expenses even as it recorded its third straight quarterly loss. In reporting its second-quarter results, Morgan Stanley said it lost $1.26 billion, after accounting for one-time charges including an $850 million expense related to paying the government back after its bailout. Still, the company set aside $3.9 billion in compensation expenses, representing 72 percent of its revenue for the quarter.
In response to a question during Wednesday night's news conference, President Obama said that Wall Street had yet to change its behavior and practices.
"With respect to compensation, I'd like to think that people would feel a little remorse and feel embarrassed and would not get million-dollar or multimillion-dollar bonuses," he said.
Traditionally, Wall Street banks have set aside about 50 percent of revenue to pay their workers, though that ratio is lower at firms with larger commercial banking operations, like Citigroup and Bank of America, which have a sizable number of lower-paid employees handling consumer business.
Morgan Stanley's compensation figures raised eyebrows among some analysts, who peppered Chief Financial Officer Colm Kelleher with questions about employee pay during a conference call.