Despite Turmoil, Wall Street Bonuses Survive

Oct. 25, 2008 -- Chaos in the financial system may translate into better than expected bonuses for Wall Street.

Yes, you read right. While the outlook is pretty grim, at least compared to last year's $33.2 billion bonanza, compensation consultants expect a 30% to 50% decline in payouts this year, but billions will still flow.

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The bonus pool is being artificially inflated by a combination of job losses (meaning fewer people sharing the smaller pot), merger guarantees and efforts to retain or attract key employees. Some workers will get nothing for sure, especially on desks that have had the worst performance. Senior-most executive officers will probably see their bonuses slashed 70% to 100%, according to Alan Johnson of Johnson Associates.

But others, especially stars, and those in well-performing groups, will get their millions. "There are people doing well," says Johnson, an executive pay consultant who specializes in Wall Street compensation. "Accruals are down, but not as much as you would think."

If Johnson's predictions hold out, Wall Street's 2008 bonus pool will be $19.9 billion to $23 billion. Johnson compares the current downturn to the 2001-2002 period, only then there was not this "artificial prop up" of the bonus pool. "On a purely Darwinian basis, bonuses would be down a lot more," he says of this time around.

Through the first nine months of this year, combined net revenues for Lehman Brothers, Citigroup, JPMorgan Chase, Bank of America, Merrill Lynch, Goldman Sachs and Morgan Stanley are down 27%, to $202 billion, according to their quarterly financial statements.

Compensation costs for investment banks like Goldman are typically close to half of revenues, but bonuses are just one component of that. Base salary and benefits make up about 60% of a firm's reported compensation costs. The rest is in incentive and other deferred compensation.

The same banks collectively recorded $97 billion in compensation expenses so far this year, a drop of just 7.4% from last year. Again, bonuses are just a portion of this expense.