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Wall Street Braces for Smaller Paychecks

A plunge in trading revenue and Europe’s sovereign-debt crisis are forcing Wall Street to rethink longtime pay practices. Investment banks are slashing bonuses for 2011 and considering freezing pay levels for some junior bankers. That means total compensation at big banks will likely fall 20 percent to 60 percent this year, depending on the firm and the job, according to six senior bankers.

Morgan Stanley (MS), owner of the world’s biggest brokerage, is capping immediate cash bonuses at $125,000 as the firm cuts pay and defers more compensation for senior executives, according to a person briefed on the plans. Goldman Sachs Group (GS) reduced its compensation and benefits expense 21 percent in 2011, to $12.2 billion, as revenue slid 26 percent. Average pay for Goldman’s 33,300 employees fell to $367,057, down from $430,700 in 2010.

Pay growth for some junior investment bankers also is expected to slow. According to a person with direct knowledge of the decision, Credit Suisse Group (CS) is likely to suspend its practice, an industry norm, of boosting pay automatically each year for analysts, associates, and vice-presidents. While those employees will get regular annual salary raises this year, bonuses probably will be lowered to keep total pay flat, according to the same person. This would affect bankers working in mergers and acquisitions and underwriting, but not trading departments. At Deutsche Bank (DB), senior executives are evaluating whether to cut or freeze pay for the top tier of vice-presidents as a way to pare all junior banker pay, says a person familiar with the matter. John Gallagher, a Deutsche Bank spokesman, declined to comment, as did Victoria Harmon, a spokeswoman at Credit Suisse.

Base pay for junior bankers, through the vice-president level, typically rises in lockstep by about 15 percent to 20 percent a year. Younger bankers, who make up about 75 percent of the investment banking workforce at Wall Street’s biggest firms, often start with a $200,000 annual salary and can expect $240,000 or $250,000 in the second year, say two senior bankers. A banker might spend three to four years as an associate and then three years as a vice-president before he or she can be named director. Top-producing vice-presidents in their third year, sometimes called VP-3s, can get up to $700,000 in total compensation, says a senior Wall Street banker.

Pay among junior bankers tends to be more aligned with peers at competing firms than it is for senior bankers, the people say. Needless to say, there is plenty of gossip about pay in the lower ranks, and word of pay cuts at one bank can hinder recruiting at top business schools. That’s the main reason the biggest banks rarely consider such freezes. In the wake of the financial crisis, starting pay continued to increase each year.

With compensation pools down this year at almost all Wall Street banks, climbing associate pay has squeezed pay for senior managers, says a banker involved in such decisions. But cutting pay for more junior bankers can be perilous if rivals don’t do the same because it is easier for junior bankers to defect, draining a future generation of talent. Says Joseph Sorrentino of compensation consultancy Steven Hall & Partners: “There’s always the risk that people may go across the street for a better deal.”

The bottom line: Compensation at Wall Street’s biggest banks may fall 20 percent to 60 percent this year as senior bankers look to cut costs.

McCracken is a reporter for Bloomberg News in New York.
Harper is a reporter for Bloomberg News in New York.
Moore is a reporter for Bloomberg News.

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