Wall Street Bonus Gains May Be Curbed by Banks’ Revenue Drop

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

Wall Street’s annual bonuses will increase about 10%, half as much as bankers expected earlier this year, after companies including Morgan Stanley reported declining third-quarter revenue, compensation consultants said.


“Everyone came charging out of the gate at the beginning of the year and the market didn’t do as well as everybody thought,” said Deborah Rivera, founder of Succession Group, an executive search firm in New York. “That’s definitely going to have an effect on people’s bonuses.”


Morgan Stanley, Goldman Sachs Group Inc., Lehman Brothers Holdings Inc., and Bear Stearns Cos. together reported a 16% decline in third-quarter revenue from the average of the first and second quarters. It’s the biggest drop since 1998 following Russia’s debt default and the near-collapse of the Long-Term Capital Management LP hedge fund. Revenue is shrinking as New York-based investment banks begin to decide on annual bonuses for bankers, traders, and other employees.


“There’s clearly pressure on compensation,” said Goldman Sachs’s chief financial officer, David Viniar, when the third-largest American securities firm reported earnings on September 21.


Almost one-third of 89 firms surveyed by the Securities Industry Association expect bonuses to be unchanged from a year ago and another third said they haven’t decided. About 2% expect bonuses to be “significantly higher,” according to the SIA, Wall Street’s Washington-based trade group. The survey included Lehman and excluded firms such as Morgan Stanley, Goldman Sachs, Bear Stearns, UBS AG, Merrill Lynch & Co., and Citigroup Inc.


Executive recruiters and compensation consultants, including Sibson Consulting and Compensation Resources Inc., said bankers anticipated a 25% increase in yearend bonuses as recently as May. Together, Morgan Stanley, Goldman Sachs, Lehman, and Bear Stearns earned a record $3.37 billion in the quarter that ended that month.


Trading desk heads with a decade’s worth of experience will probably get an average $1.4 million bonus, down from expectations of $1.6 million in May, said Alan Johnson, who heads New York-based executive recruiter Johnson Associates. Eight years of experience and a managing director title means $825,000, not $1 million, and third-year associates may get $300,000, not $325,000, Mr. Johnson said.


“Bonuses always follow the revenue,” said Marc Baranski, who runs the financial services practice of Sibson Consulting, a human resources unit of New York-based Segal Group Inc.


Wall Street bonuses probably will rise four times faster than the average 2.5% raise that American workers received during the 12 months ended in June, according to the U.S. Bureau of Labor Statistics. The average American’s pay is rising at a slower rate than inflation and is now about $38,725, the bureau reported.


For top bankers, bonuses exceed base pay. The head of fixed income at Morgan Stanley, Zoe Cruz, 49, received a $300,000 salary last year and a bonus of $7.9 million. Vikram Pandit, 47, who heads Morgan Stanley’s institutional securities business, got a $425,000 salary and a $6.9 million bonus.


Wall Street managers award the largest bonuses to employees responsible for bringing in the largest fees. This year’s results are setting up a contest between traders, who posted record results as oil prices surged, and investment bankers, whose fees haven’t grown as quickly, Mr. Baranski said.


“Compensation will be not only a firm-specific issue but also business specific,” Bear Stearns’s chief financial officer, Samuel Molinaro, said when the New York-based firm reported earnings on September 22.


Industry earnings from providing merger advice slowed as the pace of corporate takeovers fell. About $454 billion of deals were announced in June, July, and August, compared with $971 billion in the previous six months. The value of deals announced in September was $98.5 billion, the lowest in the past 12 months.


Goldman’s revenue from fixed-income, commodities, and currency trading more than doubled to $1.87 billion, according to the company’s third-quarter earnings report. The firm’s merger advisory business, which ranks first worldwide among investment banks, hasn’t fully recovered from pre-recession days in 2000 and remains “lumpy,” Mr. Viniar said. He also said Goldman probably will earn less money from stock trading in future months.


The industry’s fees from arranging stock sales also dropped, with $93.8 billion announced worldwide in the three months ended August 31, down from $201.4 billion in the preceding six months. In August, 22 initial public offerings were canceled or withdrawn as trading on the New York Stock Exchange sank to its lowest in more than two years. The scrapped sales amounted to almost half of all transactions taken off the market this year.


Interest rate increases by the Federal Reserve also are hurting revenue. Fees from managing bond sales fell about 30% in the three months ended August 31 from a year earlier.


Investment banks are setting aside money to pay for yearend bonuses. Morgan Stanley’s total compensation and benefits, including the amount set aside for bonuses, was $8 billion at the end of August, up 18% from the first nine months of 2003, according to the company’s earnings report on September 22. That equals about $150,000 per employee.


Morgan Stanley, whose third-quarter profit fell 34% from a year earlier, will keep compensation in line with its results, said the chief financial officer, David Sidwell, during a conference call with analysts.


Goldman Sachs also has set aside about $8 billion for total compensation and benefits. That amounts to about $400,000 per employee. Pay and benefits at the New York-based firm amounted to 50% of revenue in the nine months ended August 31, about the same as last year.


Some Wall Street bankers will be fortunate to see any increase in their bonus, said Michael Karp, managing partner of New York-based Options Group. “At this point, a lot of the big banks are going to be giving bonuses that are flat to slightly down,” he said.


Limiting bonuses is risky because securities firms can lose top talent by not paying enough, said Anton Schutz, who helps manage $600 million in stocks at Burnham Investors Trust.


“If they get stingy on the bonus bumps, Wall Street will start the game of musical chairs all over again,” said Schutz, who owns shares of Morgan Stanley, Merrill Lynch, Lehman, and Citigroup Inc.


The New York Sun

© 2025 The New York Sun Company, LLC. All rights reserved.

Use of this site constitutes acceptance of our Terms of Use and Privacy Policy. The material on this site is protected by copyright law and may not be reproduced, distributed, transmitted, cached or otherwise used.

The New York Sun

Sign in or  Create a free account

or
By continuing you agree to our Privacy Policy and Terms of Use