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Are Wall Street's Massive Pay Cuts Fair?

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It’s earnings season now and as Wall Street firms prepare to release their fourth quarter results and finalize 2011 bonus numbers, bankers are bracing for a big hit to their compensation packages.
The Wall Street Journal reports that bankers at firms like Dow Jones (^DJI) component Bank of America (BAC), JP Morgan (JPM), Credit Suisse (CS) and Citigroup (C) can expect bonus numbers to at their lowest since the financial crisis struck in 2008.
At Goldman Sachs (GS), a significant number of the 400 partners will see their 2011 compensation halved from that of 2010, while those working in the firm’s fixed-income trading unit will get paychecks that are 60% smaller.
Similarly, at Morgan Stanley (MS), investment bankers and traders will take home bonuses that are 30% to 40$ smaller than those from 2010.

Each quarter the banks set aside a percentage of revenue for benefit costs. Through the first three quarters of 2011, total compensation and benefit costs at 34 publicly traded financial firms tracked by The Wall Street Journal were on pace for a record-high $172 billion. The calculation is based on the companies' reported results and projections by analysts.

But industry observers expect that when all is said and done for the year, many firms will adjust their benefit costs sharply downward, partly to appease shareholders frustrated by soft profits.

If the companies apply the same ratio for 2011 as 2010, overall compensation and benefits for last year would be $159 billion for the 34 companies tracked by the Journal, the smallest total since 2008.

If Goldman maintains its rate of pay, the average employee at the firm would take home $385,000 for 2011, a 10.7% fall from $431,000 in 2010 and a far cry from the high of $661,000 in 2007.
And while a middle-six figure take-home annual compensation package might not be something to be sniffed at, a banker I spoke to, an associate at a midsized investment bank, explained that this year’s pay cuts are harsh on employees, because in the cut-throat Wall Street environment, those who’ve failed to bring in business or profits will have already been fired or laid off, and those remaining will have done well and so deserve to get paid well.
“It's difficult because, when all is said and done, the bankers and traders themselves are commodities. While most underperformers, and the ones responsible for the softer profits, are laid off, the ones who were 'carrying the load' and having relatively stellar years still need to be paid or else a competitor can easily come in and one-up a lowball bonus. It's a very transparent market - everyone knows each other and everyone talks,” the 27 year-old banker said.
Still, even if bankers might feel they got a ‘lowballed’ bonus, they can find some comfort if they were awarded more stock-based bonuses. Since most Wall Street firms saw their shares slide dramatically in 2011, those who received bonuses in the form of stock options can expect a healthy jackpot sometime in the future.
POSITION:  No positions in stocks mentioned.