Tuesday, November 18, 2008

Heard on the Street article on bonuses

I might as well keep on the bonus beat - somebody's got to do it.  Here's an article from the Heard on the Street section of the WSJ:

Heard on the Street:  For Wall Street, Less is More

Bring out the hair shirts? The decision by top executives at Goldman Sachs to join peers at Deutsche Bank and UBS in forgoing bonuses for the year is asensible act of contrition. But it is hardly radical.

Against the backdrop of a financial crisis and intense public scrutiny --particularly after government capital injections -- they had little choice. And, from a purely self-interested perspective, executives have more to gain from getting their share prices up again.  [a here -- Or from keeping the government at bay, so the pigs can return to the trough next year]

Now that Goldman has made its move, Morgan Stanley will surely follow --something potentially painful for its chief executive, John Mack, who made the same gesture last year.

Cutting the pay of a handful of top executives is window dressing, of course.  What matters is the size of broader bonus pools.  [emphasis added]  

Those will be way down anyway because of weaker revenues.

But the firms also need to show restraint on the percentage of those revenues they pay out.

One part is political. The government and regulators probably don't want to get intimately involved in setting Wall Street pay. [no, of course not, they just want to shovel money into them]  Goldman and Morgan Stanley --the two remaining independent firms and the two banks that report first --shouldn't give them a reason to do so.

Keeping the ratio of compensation to net revenues well below the usual target of about 50% is one vital element.  [so guess they'll make it 49%...]

Adopting some of the new ideas on pay pioneered by UBS to avoid excessive risk-taking would be another. For example, the Swiss bank is to keep a portion of cash bonuses in escrow -- with a provision for some to be deducted if the bank generates losses in the future.  [So, you give the bankers a bonus the year they lose lots of money, but you don't give it to them right away, just in case they lose lots of money again.]

More important than politics, however, Wall Street firms need to show their investors they will share the pain in tough times. Morgan Stanley failed last year. It raised the overall compensation ratio to 59%, after taking a big hit to net revenues from a bad mortgage-related trade. Goldman took its ratio down to 44% because it had a very strong year.

This year the pair should surprise investors, who have lost their shirts in
recent months, by being tough.

Weak revenues will ensure lower bonuses anyway. But the firms should make a point by also paying out a lower-than-usual percentage of that shrunken revenue number in compensation.

If investors are to commit new capital in the future, management needs to demonstrate a willingness to put profitability first.

This is the ideal time. With all of Wall Street under extreme pressure, the risk of losing staff is much reduced.  [So remind me, why are the banks paying bonuses at all?]

The fourth quarter is likely to be grim. But with Wall Street still fighting
to prove that its business model can get through the crisis, this is no time to
go soft on pay.

-- Thorold Barker

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