Corporate Governance

Executive Compensation and the Financial Crisis: A Problem In Search of a Solution (Still) (Part 6)

By J Robert Brown Jr.

How about the bonus pools and the partnership style form of compensation?

First, bonus pools of large financial firms appear to be holding steady at around 50% of net earnings (although announcements for 2010 bonuses have yet to be collectively disclosed).  Goldman did shrink the bonus pool for services in 2008 but only after tremendous public pressure.  As net earnings of these firms rise, so will the bonus pool.  Indeed, evidence of increased compensation and a return to the days of profligate spending have, at least anecdotally, alread begun to surface.  See Wallets Out, Wall St. Dares to Indulge.     

This does not mean that there have been no changes in the approach to compensation.  Evidence suggests that there will be changes, but not the kind anticipated.  The partnership approach to compensation looks resilient.  But the division of the spoils may well change.  Some glimmer of this can be seen from the announcement by Morgan Stanley about the planned change in its bonus pool.

The WSJ reported that bonuses at Morgan Stanley would be 10-25% lower than the year before.   Admittedly, these look to be preliminary numbers that could easily change.  Nonetheless, they were much trumpeted as potential evidence of a change in Wall Street culture.  See Morgan Stanley Promises to Curb Pay ("All that means we may never see again the $69 million lofty level that Goldman Sachs CEO Lloyd Blankfein received for 2007, the biggest ever payday for someone in a Wall Street corner office. Blankfein's record seems safe. Or at least until people forget about that little financial crisis."). 

In fact, a reduction of the bonus pool was to be expected.  Last year, Morgan Stanley devoted over 60% of its net revenue to the pool.  It was heavily criticized for doing so.  Reducing the figure to something closer to the industry norm of 50% was likely.  

Yet the CEO of Morgan Stanley, James Gorman, may well do things differently.  He has publicly criticized the bonus culture on Wall Street.  He remarked at a conference sponsored by the Securities Industry and Financial Markets Association in November that "some individuals 'who in many cases were frankly pretty average' made as much as 10 times that of people in other industries during the financial crisis."  One way this can be read is to suggest that the "average" employee ought to be paid less. 

The reports on the possible cuts in the Morgan Stanley bonus pool arguably reflect this philosophy.  Who would see cuts in their bonus?  The WSJ noted that the cuts would:

• affect traders, back-office staff and other major employee groups, though unusually strong performers in equity capital markets and investment banking could be spared.

So reduce back office bonuses but spare the strong performers.  What about top executives?  As the article noted, those folks "might be pressed to take less."  Not a ringing endorsement of cuts at top levels. 

While the details will be fleshed out, it looks like Morgan Stanley is moving to redistribute the bonus pool so that the strong performers and top executives get more and the others get less.  In short, there may well be a less "equitable" distribution of the bonus pool within the firm. 

Full post as published by The Race to the Bottom on December 17, 2010 (boomark / email).