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The Bonuses Keep Coming

Year-End Payouts Dipped Only Slightly on Wall St.

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Washington Post Staff Writers
Tuesday, January 29, 2008; Page D01

NEW YORK The grim toll that the U.S. mortgage crisis has taken on financial markets has been felt worldwide, from traders in Hong Kong to small-town mayors in Europe to pensioners in the American Midwest.

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But largely spared have been financiers on Wall Street, a place where brokers, bankers and traders are called into corner offices at the end of each year and told how large a bonus they'll receive for the year's work. The size of the figure reflects their value to the company, and many feared -- even complained out loud -- that the amount would be badly affected by the subprime mess.

They needn't have worried. Wall Street bonuses totaled $33.2 billion in 2007, down just 2 percent, by the estimates of the New York state comptroller's office.

Seven of Wall Street's biggest firms boosted their total compensation and benefits to a combined $122 billion, up 10 percent since 2006, despite seeing their net revenue collectively fall 6 percent, according to Equilar, an executive-compensation research firm based in California. Mortgage-related losses reported by the seven firms totaled $55 billion and wiped out more than $200 billion in shareholder value.

"In a year when shareholders have lost nearly half the value of their holdings, it strains one's imagination how the firms can continue to give such pay," said Michael Garland, director of value strategies at CtW Investment Group, which works with pension funds on corporate governance. "You've got Wall Street guys engineering derivatives securities that destabilized broader financial markets -- it's hard to understand why anyone should get paid for that."

The seven large firms -- Merrill Lynch, Citigroup, Bear Stearns, Morgan Stanley, J.P. Morgan Chase, Lehman Brothers and Goldman Sachs -- richly compensated their employees and executives even as three of those firms suffered their biggest losses ever in the final months of 2007. Employee compensation at those firms was equal to 47 percent of net revenue in 2007, compared with 40 percent the year before, according to Equilar. This change was partly due to an increase in employees at some firms.

The bonus figures, banking executives and some compensation experts said, reflect an ingrained pay culture on Wall Street that leaves firms little choice but to keep paying hefty bonuses to their executives and traders, especially those in divisions that are still making money. Some employees involved with mortgage-related securities have taken cuts. But heading into a tough year, when a credit crunch and possible recession are expected to dampen business, the firms reason that they must continue to reward revenue makers to stay ahead.

One Wall Street executive said his firm would most certainly lose its high-caliber employees if they were not compensated in accordance with their performance. "That's a fact," said the executive, who spoke on condition of anonymity because he was not authorized to speak publicly on the matter. "That's not just a myth generated by greedy Wall Street. I've seen it happen."

Some investment banks already have a list of people they would like to pluck from rival firms and are waiting for their employers to be in a tough position, said Steven Hall, managing director of Steven Hall & Partners, a compensation consultancy.

"You have to pay people who are performing, even in bad times, in order to keep them in place," Hall said. "There is not a lot of willingness to stick around when bonuses aren't being paid out."

But skeptics question the notion that an exodus would occur, noting that Wall Street firms are in firing, not hiring, mode.

Wall Street firms tend to pay bonuses based on a combination of individual performance, unit performance and overall institutional performance. The payments usually represent 60 to 80 percent of an employee's take-home pay. A senior executive may have a base pay of $200,000 to $300,000 but make another $2 million to $10 million in bonuses, a portion of which may be in company stock.

Not all firms on Wall Street performed poorly. Most notably, Goldman Sachs posted another record year, with only modest mortgage-related write-downs. Chief executive Lloyd C. Blankfein took in a $67.9 million bonus for 2007. And even those firms that fared badly, dragged down by massive losses in subprime mortgage securities, had other divisions that posted record profits. These came largely in investment banking, equities capital markets, mergers and acquisitions, and private wealth management.

Because rainmakers continue to command the most generous bonuses, this has led to pay disparities both among investment banks and within them, executive-compensation experts said.

Michael Karp, chief executive of Options Group, a global executive search and consulting firm that specializes in financial services, said bonuses were down by as much as 50 to 60 percent in subprime-mortgage-related departments, while groups such as investment banking took in bonuses that were on average 10 percent higher than in 2006.

At Morgan Stanley, those deemed responsible for the outsize mortgage losses, which the company blamed on bad bets by a single trading team, saw less pay. Neal Shear, the trading chief, has been demoted. Zoe Cruz, the co-president overseeing the securities unit, was ousted in November. Neither was among the top-paid executives this year. In 2006, they were the highest paid at the firm after chief executive John J. Mack. Mack said he would forgo his bonus for 2007 in light of the mortgage write-downs, in which the firm massively restated the value of those holdings on its balance sheets.

Some shareholders argue that a fundamental overhaul of Wall Street pay is necessary, calling for measures like claw-backs (giving back pay based on short-term earnings) and bonuses based on performance over multiple years. Indeed, the people who generated billions of dollars on fixed-income desks in the past five years include those who dealt in mortgage-related securities that turned toxic last summer. Profits from the once-highflying fixed-income business have helped triple the average Wall Street bonus in five years, to $180,420 last year from $60,900 in 2002, according to the New York State comptroller's office.

Others want a system whereby pay is tied more closely to overall corporate performance. It is only fair, they say, as shareholders buy shares in the bank as a whole, not in particular divisions.

Compensation experts noted that some Wall Street firms have already moved to preserve cash and keep employees tied to the company by paying a higher proportion of this year's bonuses -- as much as 70 percent -- in the form of restricted stock, which cannot be cashed in if they leave the firm immediately.

Some firms said they want to make longer-term changes. An official at Merrill Lynch, which made bigger payouts last year compared with 2006 despite heavy losses, said its new chief executive, John A. Thain, would recalibrate the bonus system to reflect overall company performance. It appears that 2007 could be the peak year for overall compensation, just as 2000 was for the tech-boom era, with a cautious Wall Street dampening bonus expectations for 2008.

Mortgage-related executives have already felt the pinch, though they didn't end the year empty-handed, according to Options Group. The average bonus for a vice president who sells mortgage-backed securities fell by roughly half in 2007. At the end of last year, that executive would have received only $300,000 to $400,000.

Merle reported from Washington.


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