Wall Street Pay Cuts? White House Plan Has Loopholes

Oct. 23, 2009 — -- The details of the Obama administration's efforts to curb excessive compensation on Wall Street emerged Thursday, with dual announcements from pay czar Kenneth Feinberg and the Federal Reserve Board. And while the potential loopholes do not appear large enough to drive the proverbial armored truck through, the securities industry is already set on finding ways to continue to pay traders and investment bankers exceptionally well, by any measure.

"Whether by deferring compensation over a couple of years, or paying more of it in the form of stock, the majority of Wall Street firms will still be able to pay people very well, in some cases more than before," said Eric Moskowitz, head of compensation consulting at New York-based Options Group, a global executive search firm focused in the financial industry.

With so much public scorn directed toward Wall Street's traditional practice of back loading a year's worth of compensation via "incentive-based pay" (i.e. bonuses), a number of firms have gone ahead and boosted base salaries.

Historically, base salaries on Wall Street have been a relatively small part of a trader's or investment banker's total annual pay package. Senior people, such as managing directors, could, in past years, expect to collect base salaries of around $200,000, according to Options Group, which produces extensive annual surveys on securities industry pay trends.

But Moskowitz said that in the past six months, some of those same managing directors, including some at banks that accepted Troubled Asset Relief Program funds, saw base salaries bumped up to $500,000 or more in light of the bonus backlash.

"Firms can't just sit back and lose all their best people to rivals," Moskowitz said, citing large scale defections at UBS earlier this year as examples of what can happen when compensation gets curbed. In a move that was widely applauded, UBS announced at the start of 2008 it would not pay any bonuses. The firm instead, Moskowitz explained, upped many key staffers' base pay.

Both Feinberg and the Federal Reserve have set sights on significantly reforming Wall Street pay practices, releasing simultaneous overviews of their intentions Thursday. The Feinberg plan tries to halve the average combined compensation of the 25 highest paid employees at companies that were the biggest bailout beneficiaries, including Citigroup, Bank of America and AIG.

A Federal Reserve Board proposal, meanwhile, is aimed at reviewing and overhauling compensation trends in the financial industry in general, with an eye toward ensuring better alignment of pay and proper risk management practices.