Wall Street pay will rise as firms’ profitability increases, while large banks are unlikely to make the “irrational” mistakes of the past, Morgan Stanley Chief Executive Officer James Gorman said.
“Comp should be a reflection of returns for shareholders, so there’s no absolute level” that should be targeted, Gorman, 55, said in a Bloomberg Television interview today with Erik Schatzker. “As all of the banks are recovering, shareholders are starting to get better returns and compensation will reflect that and reflect market competitive pressures.”
Changes in compensation costs trailed increases in first-half revenue at Goldman Sachs Group Inc. and the investment-bank divisions of Morgan Stanley and JPMorgan Chase & Co. (JPM) Pay expenses at the five largest Wall Street banks represented 37 percent of revenue in the first six months, down from 39 percent a year earlier.
“I think things are pretty rational right now,” Gorman said. “It is a sober environment that we operate in. The leadership of the banks, all of whom I know pretty well, are very sober quality professional people. I don’t see a lot of holes at the large institutions in terms of rational behavior.”
All five lenders increased their return on equity in the first half. The shares of each bank are up at least 28 percent this year.
Morgan Stanley (MS), owner of the world’s biggest brokerage, set aside 1.4 percent less to pay people at its investment-banking and trading division in the first half, even as adjusted revenue climbed 6 percent. Salaries, bonuses and previous deferred awards equaled 43 percent of adjusted revenue, down from 46 percent a year earlier. Chief Financial Officer Ruth Porat said in April that the bank seeks to set aside about 40 percent of revenue for pay at the unit.
Goldman Sachs said this week it set aside a smaller portion for staff pay and cut 700 jobs in the first half as it seeks to pare expenses. Compensation rose 10 percent to $8.04 billion in the six months, while revenue increased 13 percent to $18.7 billion.
Compensation for corporate and investment bankers at JPMorgan, the largest U.S. lender, was almost unchanged in the first half from a year earlier. The $6.36 billion represented 33 percent of revenue at the unit, down from 34 percent in the year-earlier period.
Gorman has been aggressive in deferring and cutting pay as he seeks to boost shareholder returns. The bank deferred all 2012 performance bonuses for employees getting both total pay exceeding $350,000 and incentive compensation of at least $50,000, a person briefed on the matter said in January.
In January 2012, as the bank was cutting pay for senior investment bankers and traders by an average of 20 percent to 30 percent, Gorman said that employees who were unhappy with their pay were welcome to leave the firm.