Bank of America Corp.’s investment banking division set aside about 10 percent less for employee compensation than a year earlier as revenue slipped, said two people with direct knowledge of the decision.
Managing directors in areas that underperformed compared with 2009 saw pay shrink by as much as about 20 percent, said the people, who declined to be identified because the Charlotte, North Carolina-based bank doesn’t disclose compensation figures. Employees of the global banking and markets unit, run by former Goldman Sachs Group Inc. trading head Thomas Montag, were told their year-end payouts on Jan. 27, the people said.
“It’s what you should expect considering it was a pretty volatile year,” said Alan Johnson, managing director of New York-based compensation consultant Johnson Associates Inc. “People were down more than that at other places; I’d say a 10 percent decline overall is a pretty good outcome.”
The bank joins Goldman Sachs and JPMorgan Chase & Co. in trimming 2010 pay for traders, deal makers and other personnel amid revenue slumps and regulatory pressure following taxpayer-funded rescues. Bank of America said this month that revenue in Montag’s division fell 13 percent to $28.5 billion in 2010 as trading results slipped in the fourth quarter.
About 20 percent to 30 percent of bonuses are in cash that vests in one year, and the rest will be in stock and cash that will take longer to receive, said one of the people. That compares with as little as 5 percent cash for 2009 bonuses, when the firm was under the jurisdiction of Kenneth Feinberg, then the Obama administration’s special master on compensation. The bank repaid $45 billion in U.S. assistance in 2009.
‘Fair and Appropriate’
Year-end awards typically make up the majority of compensation for investment-bank employees. The firm’s investment bank earned $6.3 billion last year, a 37 percent decline from 2009, a year in which the unit booked a $3.8 billion gain tied to a unit sale. That still made it the bank’s most profitable division in 2010, helping offset unprofitable mortgage and credit-card operations.
The bank’s “pay practices are fair and appropriate for our employees and our shareholders,” Jessica Oppenheim, a Bank of America spokeswoman, said in e-mail.
JPMorgan’s investment bank set aside enough money to pay an average of $369,651 to each employee for 2010, or 2.4 percent less than in 2009, according to the company’s year-end financial statements. Goldman Sachs’s pool equates to an average of $430,700, a reduction of 14 percent.
Morgan Stanley cut the investment bank’s compensation pool by 2 percent to $7.08 billion. The firm doesn’t disclose the number of employees in the unit. Companywide, Morgan Stanley’s per-employee pay decreased about 3 percent when adjusting for its ownership of a brokerage joint venture for part of 2009 and a U.K. bonus tax last year, a person briefed on the bank’s expenses said this week.
Wall Street firms’ soaring pay over the last three decades incentivized traders to disregard risk and limited regulators’ ability to lure talent to police banks, the Financial Crisis Inquiry Commission wrote in a 545-page book published this week. As firms felt the need to compete for talent with “aggressive incentives,” total compensation at U.S. banks and securities firms climbed to $137 billion by 2007.
“The dangers of the new pay structures were clear, but senior executives believed they were powerless to change it,” the panel wrote. Former Citigroup Inc. Chief Executive Officer Sanford Weill told the commission, “If you look at the results of what happened on Wall Street, it became ‘Well, this one’s doing it, so how can I not do it?’”
Morgan Stanley CEO James Gorman said in November that Wall Street must fix a culture that contributed to the financial crisis by idolizing individual employees and giving them incentives to take outsized risks.
Fixing the culture will require “creating a compensation system that better aligns or balances shareholders’ interests and the broader society’s interests with the individual’s interests, and changing the perception that it’s the individual that’s the hero,” said Gorman, 52.
Investment banks set aside a portion of revenue to reward employees and typically decide bonuses at the end of the year based on annual results.