Banks stung by criticism over pay despite recent changes
Saturday, January 23, 2010
NEW YORK -- Wall Street banks thought they had made big concessions to populist anger over large year-end bonuses. On Tuesday, Citigroup said its compensation pool for 2009 had shrunk 20 percent from the prior year. On Wednesday, Morgan Stanley announced its top executives would receive 75 percent of their pay in deferred compensation. And on Thursday, Goldman Sachs said its bonus pot represented just 36 percent of its revenue, the lowest ratio since it became a public company in 1999.
But by the end of the week, the firms were facing a president proposing new restrictions on their activities and threatening them with a showdown. Lawmakers eager to impose a British-style tax on bonuses barely acknowledged Wall Street's efforts at restraint. Treasury Secretary Timothy F. Geithner, who has advocated a more moderate approach to financial reform, was being overshadowed by Paul Volcker, who favors more aggressive change. And second-term prospects for Federal Reserve Chairman Ben S. Bernanke, who led the bailout of the financial system with Geithner, were dimming.
The turn of events has alarmed many banking executives, who contend they did much of what was asked of them. They say they have paid back the billions of dollars in government rescue funds, with interest, and they insist they are responding to cues from Washington to change pay practices. They say they have learned from their mistakes, reducing their use of borrowed money and clearing toxic assets from their balance sheets, but that the continuous stream of anti-Wall Street rhetoric from Washington is prolonging public anger and hampering their efforts to move forward.
During this earnings season, the nation's biggest banks have reported substantially improved results for 2009 but only slightly higher compensation, more of which would be paid in the form of company stock that cannot be accessed for a few years.
As a group, the banks -- Goldman Sachs, Morgan Stanley, J.P. Morgan Chase, Citigroup and Bank of America -- disclosed compensation expenses totaling $114 billion for 2009, up 4 percent from the previous year's $109 billion. This, despite revenues that jumped 63 percent to produce combined profits of $31 billion.
More deferred pay
While the pay figures are still astounding by Main Street standards, the numbers represent a concession by Wall Street to public outrage over multibillion-dollar bonuses just a year after taxpayers kept the financial system intact with a multibillion-dollar rescue.
But questions remain about whether the firms would continue down a path of uncharacteristic restraint, and just how significant the changes to their pay practices actually are.
In response to mounting criticism from lawmakers and regulators, industry executives said they had restructured compensation so that pay packages would include more deferred stock, and less cash, in an effort to tie compensation to long-term performance.
Analysts and compensation experts largely agree on the merits of this change. But they also note that the shift could have the effect of artificially lowering the firms' closely watched total compensation figures. That's because under securities rules, companies record deferred stock only when the shares vest. For example, if an employee receives a $1 million pay package, but half of that is in deferred stock that vests years later, only $500,000 would show up in the company's current compensation pool.
"I'll buy the idea that compensation may come down for next year, but I don't want to bet too much on it," said Brad Hintz, an analyst at Bernstein Research and a former executive at Morgan Stanley and Lehman Brothers. "If they increased the amount of equity substantially, then really, they haven't really changed . . . They've just pushed the compensation expense out into the future, in which case it's going to rise again."
Lucas van Praag, a spokesman for Goldman Sachs, said the notion that the bank was artificially lowering compensation expenses was inaccurate. He said the firm's $16.2 billion compensation expense for 2009 includes salaries, medical benefits and payroll taxes, as well as the value of prior-year stock awards that had vested.
"The cynical argument just doesn't hold water," van Praag said. "I suppose at the very, very margin, you could say that there was a tiny grain of truth in that, but it's simply not material."
How much is enough?
J.P. Morgan, which also announced last week a lower ratio of revenue set aside for compensation, said a number of factors contributed to reducing that figure by several percentage points to 33 percent, including the increased level of equity in compensation and a one-time bonus tax in Britain. Going forward, bank executives said, the revenue-to-compensation ratio for its investment banking division will be closer to 40 percent.
"The reason why it might be close enough to 40 next year is because you're amortizing last year's" equity awards, chief executive Jamie Dimon explained in a conference call last week.
At a hearing Friday on compensation in the financial industry before the House Financial Services Committee, experts warned that not enough had been done to address dangerous pay practices, which they say contributed to the financial system meltdown.
"Having done little to change either the incentives or the constraints facing the financial sector, we cannot expect a marked change in behavior," said Joseph E. Stiglitz, an economics professor at Columbia University and a former chairman of the Council of Economic Advisers. "Of course, in the immediate aftermath of the crisis, they and their supervisors may be chastened, though at least for some seemingly far less than one might have thought, given the enormity of the recent calamity."