Wall Street: Taking Bailouts, Giving Bonuses?

Financial Firms Still Offer Year-End Bonuses Despite Receiving Government Aid


Nov. 12, 2008

The nation may be diving headlong into recession, but that's not stopping financial firms from a cherished year-end tradition: the awarding of bonuses.

Wall Street will distribute bonus checks come December because that is how Wall Street works, experts say.

Those checks will be smaller than the big payouts of recent years, however, according to Johnson and Associates, an executive compensation consulting firm, which has released a report estimating that Wall Street bonuses will be down as much as 70 percent compared with 2007.

The number of bankers who will share the bonus pool has also decreased because of layoffs, the report found.

The top executives will likely get paid "primarily in paper," meaning stocks and stock options, according to Alan Johnson of Johnson and Associates. Pay will be down, he said, but there will still be "thousands of people who make millions of dollars."

In the report, he said, however, that "thanks in part to the financial bailouts and mergers we've seen recently, the decline in incentive payments won't be as drastic as first thought."

Money in, Money out

Goldman Sachs and Morgan Stanley are accepting a combined $20 billion in taxpayer money under the federal economic stabilization plan or the TARP.

According to SEC filings, Goldman Sachs and Morgan Stanley have set aside a combined $11 billion for bonuses in the first nine months of this year, down more than 25 percent compared with last year.

When contacted about this story, most banks refused to comment directly but noted that no decisions had been made about year-end compensation. At least two bank sources told ABCNews.com that while government funding is part of their overall capital pool, it would not be directly used for year-end bonuses.

Johnson, said, however, that "it's not rocket science" to figure out that "it's the same pool of money."

One former investment banker, who asked not be named, said he didn't buy the argument that bonuses aren't coming from government money. He said it was like putting taxpayer money in your left pocket and paying bonuses from your right pocket.

The same banker said that, in recent years, an average managing director at an investment bank may have made $200,000 in salary but received a $1 million to $4 million bonus. It is the bonus, he said, that motivates bankers.

Right Time for Bonuses?

Nearly everyone agrees that Wall Street has a PR problem.

With Wall Street experiencing its worst season since the Great Depression, and with the federal government stepping in to give money to financial institutions, many are asking whether this is the right time to be handing out any bonuses at all. Bonuses, after all, are supposed to reward good performance.

Nine banks at the center of the government plan to ease the financial crisis are under scrutiny: Goldman Sachs, Morgan Stanley, Citigroup, JPMorgan Chase, Wells Fargo, Bank of America (including Merrill Lynch), State Street Corp. and Bank of New York Mellon.

Of the nine, JPMorgan Chase and Wells Fargo are considered to be strong banks. They are widely believed to have been forced into the plan, an apparent attempt by the Treasury to treat all major banks as equals.

Wells Fargo released a statement saying that it didn't need "government money to pay for compensation," adding that the company "earned $1.64 billion in third quarter 2008, $5.39 billion in the first nine months of 2008, and $8.06 billion in 2007."

"Good for them, they made some smart business decisions," said Steve Ellis, vice president of Taxpayers for Common Sense. "But it's not like they're not getting money and a benefit from Uncle Sam."

JP Morgan Chase and Wells Fargo are receiving a combined $50 billion in taxpayer money.

Yet, the average American taxpayer, with a median household income of $50,233, might object to the idea of paying part of the seven-figure incomes of bankers.

Similarly, State Street Corp. said in a statement: "We do not intend to use the TARP capital to pay bonuses."

Regardless of their health, all nine banks are, so far, on track to award bonuses this year, experts say.

Finance Sector's Brain Drain?

According to one bank official, banks have a tricky situation on their hands. The banks need to make sure that they retain talent through adequate compensation, especially as the crisis unfolds. They also have to honor contractual obligations while meeting the public relations challenge.

Some bank officials say they fear a "brain drain" to other areas of finance or the private sector if bonuses decrease. For bankers making seven figures, though, finding jobs with comparable compensation could be difficult in the current economy.

According to Johnson, the government has done a bad job of managing expectations.

"If the government had invested in the baseball business, you wouldn't say, 'Don't pay the baseball players,'" he said.

"The cat's out of the bag," said Dave Schmidt, an analyst with James F. Reda and Associates, pointing out that there is a spotlight on everything the banks do. "Even if, in their minds, they have some justification for a particular level of pay, to explain that to the world will be very difficult."

Top Level Compensation Limits

There are now at least two different investigations into CEO compensation.

Rep. Henry Waxman, D-Calif., who heads the Congressional Oversight Committee, is spearheading a congressional investigation. The banks at the center of the TARP program were told to hand in details of their compensation plans to Congress by Nov. 10, but the deadline has now been extended.

Similarly, New York State Attorney General Andrew Cuomo asked the nine banks to hand in information on compensation to his office by Nov. 5. The New York Times reports that Cuomo's office has received some preliminary paperwork from banks.

Cuomo has already succeeded in convincing AIG to freeze millions in payment to former AIG CEO Martin Sullivan and other top executives.

Bailout vs. Performance

What about the limits on executive pay in the rescue plan?

Treasury spokeswoman Brookly McLaughlin has refused to comment directly on bonus programs.

"Treasury has always believed pay should be for performance," she said. "Every public company should, including and especially ones getting taxpayer money, should compensate based on performance.

"Every bank that accepts this money first must agree to the compensation restriction passed by Congress," she said.

The $700 billion government rescue plan addresses only compensation of five executives: the CEO, the CFO and the three other most highly compensated executives. The plan does not set a limit on executive pay, but rather, states that any salary above $500,000 for these five executives will not be tax deductible for the company.

Ellis calls the move "largely symbolic."

The legislation also includes restrictions on golden parachute payments to any executives leaving the company.

One additional guideline calls for the "required recovery of any bonus or incentive compensation" paid to a senior executive officer based on information that is proved to be "materially false." There is also a restriction on compensation that excludes incentives for senior executive officers "to take unnecessary and excessive risks that threaten the value of the financial institution."

Wall Street bonus decisions are typically made at the end of the year. Mark Borges, a principal with Compensia, Inc., a Northern California compensation consulting firm, says he expects that, due to the unprecedented circumstances this year, companies will disclose bonus amounts "sooner, rather than later."

The clearest information about bonuses comes in a "proxy statement" filed with the Securities and Exchange Commission, usually in February.

With reports from ABC News' Charles Herman.