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The Culture of Wall Street Bonuses May Be Changing for Good


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.

True, the compensation ratios are also affected by improving operating results and shrinking employee headcounts. When revenues and profits rise, there's more money to distribute to employees and shareholders, or to be held on the books as retained earnings. And if the banks have also cut their staff – as both Goldman and JP Morgan Chase did, to the tune of 3% each – there are fewer employees around to collect bonuses. That adds up to a reduction in the compensation ratio.

But there has been intermittent and quiet grumbling among some institutional investors about Wall Street compensation, especially as the return on equity at many of these financial institutions has remained well below pre-crisis levels. The pressure may have eased somewhat this year, given the performance of some of the banking shares: Goldman's stock has rallied 44% over the last 12 months, while JPMorgan Chase's shares are 34% higher. But it wouldn't take much for the grumbling to resurface, and JPMorgan, at least, must have been aware that the release of its internal report about the London Whale losses would provoke wariness on the part of investors fearful of another such mishap.

Morgan Stanley will be next to reveal the size of individual bonuses to employees; the bank will announce its own fourth-quarter results on Friday. The bank, which has struggled far more than archrival Goldman Sachs to recover from the financial crisis, has already allowed it leak out that it's taking a much tougher stance when it comes to compensation. James Gorman, who took over as CEO in 2010, has showed himself to be tough not just on cost-cutting – the bank also is axing thousands of workers – but when it comes to compensation. "There's way too much capacity and compensation is way too high," he said in an interview with the Financial Times in October. "I'm sort of sympathetic to the shareholder view that the industry is still overpaid."

Now Gorman is backing up those words with action. Even though Morgan Stanley's stock price did outperform the S&P 500 (INDEXSP:.INX) last year, it still lagged many of its peers, so the pressure from shareholders to pay out a smaller portion of revenues in compensation likely is commensurately larger. And Gorman is listening: This year's bonuses will be paid out in installments between May of this year and January 2016, and anyone who chooses to quit in irritation won't be taking any unreceived portion of that bonus payment with him.

Gorman's approach, clearly, is that he doesn't want to retain anyone within the ranks of his investment banking team or on his trading desk whose focus is solely on how to maximize that annual bonus check. If disgruntled employees want to go to hedge funds instead, so be it. It's an intriguing tactic that could resonate well with investors as long as it isn't seen to cripple the bank's ability to generate profits, offer a respectable return on equity or curtail any future growth in its share price.

It's another step in the ongoing efforts of Wall Street to find a better model for this new era. Outside critics and internal forces will continue to try to better align the incentives of the institutions, the workforce that ultimately generates the profits and the financial system overall. Don't expect to see an end to this Great Compensation Debate any time soon.

Editor's Note: This article by Suzanne McGee originally appeared on The Fiscal Times.

For more from The Fiscal Times:

The 10 Highest-Paying Companies for Millennials

25 CEOs Paid More Than Companies Paid in Taxes

5 Execs Who Should Give Back Their Bonuses

Follow The Fiscal Times on Twitter @TheFiscalTimes.
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