This week, the venerable investment bank Morgan Stanley stunned a generation of Wall Street bankers and traders by announcing that it was capping cash bonuses for 2011 at $125,000. Its top executives, including the chief executive, James P. Gorman, and his management team, will receive zero cash. And the Republican presidential front-runner, Mitt Romney, reignited a national debate over taxing the rich and Wall Street pay by revealing that his tax rate was in the 15 percent range, joining the billionaire investor Warren E. Buffett among the ranks of the favored few who pay lower rates than people earning just a small fraction of their millions. Mr. Romney hasn’t revealed his tax returns or total income, but disclosure forms indicate he received $9.6 million in 2010 and part of 2011 and had a net worth in excess of $250 million, much of it derived from his days as head of the private equity firm Bain Capital.
For most people, $125,000 is a lot of money, and for people on Wall Street, the cash bonus comes on top of base pay that has increased in recent years. The average base pay for managing directors at Morgan Stanley has risen to $400,000 and to $600,000 at Goldman Sachs. Employees also earn large parts of their bonuses in deferred cash and stock.
But $125,000 is a pittance by Wall Street standards. Citigroup paid Andrew Hall, a star commodities trader, a bonus of $98 million in 2008, the year of the financial crisis. As recently as 2010, many traders and investment bankers were arguing over whether their yearly bonuses should be eight figures rather than seven. Compensation at the 25 largest firms hit a record $135 billion that year, according to an analysis by The Wall Street Journal.
This week, Wall Street veterans were marveling that after paying federal and New York’s high state and city income taxes, Morgan Stanley employees who get the maximum cash bonus would take home just $65,000 to $75,000 on top of their base pay. “That’s an eye-opener,” said Michael Driscoll, a former top trader at Bear Stearns and Geosphere Capital, a hedge fund, who is now a visiting professor at Adelphi University. Many people on Wall Street, he said, have “multiple homes at high cost and with big mortgages, private school payments, college tuitions, car leases and payments. They were out over their skis with leverage and assumed the good days would last forever.”
Last year, Morgan Stanley increased the deferred portion of cash compensation to 60 percent from 40 percent, a move that was greeted with howls from employees who said they didn’t have enough advance notice and needed the money to meet mortgage payments, school costs and other fixed expenses. “The cost of living is so high in the New York area that we found it was a genuine hardship,” a Morgan Stanley spokeswoman told me this week. This year, cash bonuses for employees making $250,000 or less will be paid in full, with none of it deferred, although the bonuses are being capped at $125,000.
Even for those making seven figures or more, the cuts “are a blow,” Mr. Driscoll said. “The effect is psychological. To a large extent, Wall Street keeps score by what you’re paid. If you’re making $750,000 or $1 million, you’re doing O.K. by any reasonable standard. A lot of people make that kind of money. But it affects people’s psyches. It’s a hard thing for the other 99 percent to grasp, but for better or worse, that’s how they measure their value and self-worth: what their paycheck is. I’m not trying to defend that, but that’s how it is. Now they’re being paid less and less. They’re being pilloried in the press and by the 99 percent. Even Republican candidates are attacking you. People in the industry are being treated like pariahs.”
An investment banker I know lamented, “Contrary to popular opinion, bankers are people, enduring the human condition like other people. The industry is experiencing massive retrenchment, waves of redundancies, endless public criticism and repeated cutbacks in compensation levels.”
Overall compensation on Wall Street this year is expected to drop at least 30 percent, reflecting the dismal financial results reported this week by the industry standard-bearers Goldman Sachs, JPMorgan Chase, Bank of America and Morgan Stanley. The compensation ratios are hard to evaluate because this year’s payouts include the deferred portions of previous years’ awards, and include only the current components of this year’s.
Still, a trend seems clear. At Goldman Sachs, compensation was just over 42 percent of revenue, and at JPMorgan Chase it was 34 percent for the investment bank — low by historical standards. Even with the new caps on cash bonuses, Morgan Stanley’s compensation was something of an outlier, representing 51 percent of revenue, which reflects high costs at its global wealth management division, where brokers are paid on commission. Still, Morgan Stanley’s ratio was sharply lower than 2009’s 62 percent, which Mr. Gorman at the time vowed “no one will ever see again.”
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