Last month, Sanford C. Bernstein & Co. analyst Brad Hintz attended a party with his former partners at Morgan Stanley at the Metropolitan Museum of Art’s cavernous hall housing the Temple of Dendur. After a few drinks, a senior executive opened up to Hintz and said that to offset this year’s fall in revenue due to the crummy economy and rise in operating costs from stricter regulation, pay would have to decline in the next few years to “1990s level.”
“I said, ‘You mean 2000,’ ” Hintz recalled.
“No, we’ve run the numbers and it’s 1990,” the executive said, adding that bankers were plenty well-paid back then.
Word of this painful 20-year retreat has evidently not reached the rank-and-file. Fully 50 percent of Wall Street employees say they expect higher bonuses this year compared with last, according to a survey released Oct. 11 by recruiting firm eFinancialCareers. Only 20 percent of the 2,145 securities industry professionals surveyed expect their bonuses to decrease. Bonuses typically account for the vast majority of a Wall Streeter’s pay.
It’s possible that the people who responded to the survey are simply those having good years and will be paid accordingly. But data from the major investment banks suggest that bonuses will in fact be down sharply for most employees this year. At Goldman Sachs Group Inc., the industry’s standard-setter for pay, the amount set aside for compensation and benefits was 18 percent lower in the first half compared with last year's first half, according to a regulatory filing.
There’s no reason to believe bonus pools will shoot higher in the second half, since banks are expected to start reporting dreadful third-quarter results later this week.
A return to 1990 pay levels would put bonuses at about one-tenth the amount people in the business have grown accustomed to. The average bonus in 1990 was about $16,000, according to data from the New York state comptroller’s office compared with $124,000 last year. A return to paydays circa the George H.W. Bush administration would cause terrible problems for city and state leaders who have come to rely heavily on Wall Street income for tax revenue.
If there’s any good news in this bleak scenario, it’s that it will take several years for pay to drop to 1990 levels, Hintz said. Still, he says banks and brokerage houses will likely have no choice but to grind pay down because of pressure from shareholders to maximize returns while revenue looks, at best, stagnant for years to come.
“Pay is the 800-pound gorilla on Wall Street,” Hintz said. “And the gorilla does not want to go on a diet.”