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The Culture of Wall Street Bonuses May Be Changing for Good

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Pressure from shareholders and the general public has caused a major shift in the way that investment bankers are compensated, and not everyone is pleased.

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Once upon a time, Wall Street investment bankers and traders spent all year looking forward to December and January; for most of them, these were the months when they learned the details of their bonus payments, which in some cases accounted for 90% of their total compensation for the year. The rest of the New York City economy also waited with bated breath, as Wall Streeters used their annual windfalls to put down payments on new homes, buy the latest cars, and generally spend lavishly.

Even in the tough times that followed the financial crisis, a lot of those on Wall Street eyed the decline in bonuses as something they would just have to get through. At banks that remained reasonably solid but had taken TARP money, even executives heading up businesses that stayed profitable were cautioned that they would have to be patient; it wouldn't look good to dole out lavish paydays at a time when taxpayers were bailing out the financial system.

But it has been harder than most of these Wall Streeters expected to get back to what was once "normal" – and we're now seeing more signs that it won't ever happen. Indeed, just as the economy is settling in for a "new normal," so too, it seems is compensation on Wall Street, at least within many big banks.

The evidence of that has been pouring out of the investment banks banks lately. Morgan Stanley (NYSE:MS) reportedly plans to cut 1,600 jobs, and will pay out bonuses to high-earnings employees (and there are still plenty of those) over three years. Goldman Sachs (NYSE:GS) and JPMorgan Chase (NYSE:JPM) confirmed the industry trend on Wednesday when they released details of their compensation plans alongside their fourth-quarter profits.

Goldman announced unexpectedly impressive earnings, partly thanks to a big surge in bond underwriting (those low interest rates are good for something, even if it doesn't help the firm's trading revenues). Its net income soared to $2.83 billion from $1.01 billion in the fourth quarter of 2011. But the average compensation for its employees rose a relatively meager 9% to about $400,000, and fewer of them will benefit from the bonus pool. Even more intriguingly, Goldman Sachs slashed the size of that bonus pool, paying out only 37.9% of its revenue to employees, compared to 42.4% in 2011.

According to a Goldman study, the compensation ratio averaged 46% from 1999 to 2010, and the 2012 ratio is the lowest since 2009, when payouts plunged as the company struggled to reposition itself in the wake of the financial crisis.

Over at JPMorgan Chase, where net income jumped 53% in 2012 and earnings per share came in 20% higher than analysts had expected, the average compensation package actually declined, to $216,928 from $217,600 in 2011. The compensation ratio dipped to 33% from 34%. Of course, CEO Jamie Dimon's London Whale-sized personal loss affected that bottom line. Dimon's pay was cut by from $23.1 million to a mere $11.5 million as a result of the trading losses from what he eventually acknowledged was a "flawed, complex, poorly reviewed, poorly executed, and poorly monitored" trading strategy in the bank's London offices.
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