Public outrage has boiled over as billions of dollars in bonuses have been handed out on Wall Street, the center of the 2008 financial storm that contributed to the worst recession in generations and left millions of people jobless.
Even President Obama joined in, labeling the $18.4 billion in bonuses "shameful" and calling on Wall Street to "show some restraint." Seizing on the populist anger, lawmakers put together a compensation-reform bill that passed the House of Representatives on July 31 and will be brought to a vote in the Senate after the summer recess.
Still, despite all the apparent momentum building to rein in runaway pay, it looks as if Wall Street's compensation practices will largely emerge unscathed. Critics say the bill's key proposals, though well-intentioned, are non-binding, so companies can choose to ignore them. And Wall Street executives, seemingly unconcerned about further antagonizing an already agitated mob, are gearing up to boost pay. Some top firms that just last year received billions in government bailout money are thriving again and appear undaunted by the widespread criticism of big paychecks. Consider:
•Flush from two quarters of profits and having repaid the government its bailout money, Goldman Sachs has set aside $11.36 billion for compensation and benefits in the just first six months of the year, a 33% increase from last year.
•JPMorgan Chase, which also has paid back taxpayer money, reported record second-quarter revenue and has carved out $14.5 billion for pay in the first half of the year, up 22%.
•While Morgan Stanley, too, has repaid the government, the bank recorded its third-consecutive loss in the second quarter. Despite that, the bank has set aside $6 billion so far this year for compensation expenses, and $3.87 billion just in the second quarter, which represents 72% of its revenue.
"The Wall Street community is not particularly plugged into the public sentiment," says Peter Cappelli, management professor at Wharton business school. "It's a culture that hasn't cared very much about the political realities elsewhere."
Little correlation between pay, performance
Officials have blamed Wall Street's pay structure for making the financial crisis worse. Treasury Secretary Timothy Geithner said the compensation practices "encouraged excessive risk-taking." Lured by big bonuses, increasingly large numbers of bankers took risks that led the U.S. to the brink and a $700 billion government bailout for the industry.
Wall Street banks typically set aside more for compensation than other industries — about 50% of revenue to pay employees. However, the largest companies that make up the S&P 500 spend less than 22% of revenue on all indirect costs, which includes salaries, commissions and other overhead, according to a USA TODAY analysis of data from Standard & Poor's Capital IQ.
Bankers say they have to pay more to retain top talent. In Morgan Stanley's annual report, it says: "In order to attract and retain qualified employees, we must compensate such employees at market levels. Typically, those levels have caused employee compensation to be our greatest expense." The banks also say that pay is directly linked to performance and that if they don't retain qualified employees, performance could be affected.