Goldman shrinking pay shows Wall Street set for bonus gloom

Congress’s Role

Bonus expectations in the U.S. may have been tempered by the government shutdown this month and its impact on the economic recovery. As congressional budget talks deadlocked in September, U.S. employees expressed less optimism than colleagues abroad, with only 42% predicting their bonuses would rise, the survey showed.

New York State Comptroller Thomas DiNapoli said in an Oct. 22 report that the turmoil in Washington may hurt fourth-quarter profits and crimp bonuses this year.

Morgan Stanley’s institutional securities group cut its compensation-to-revenue ratio to 42% in this year’s first nine months, down from 46% a year earlier, excluding certain accounting charges. JPMorgan’s corporate and investment bank pared its ratio to 31% from 34%.

Goldman Sachs’s 41% surprised analysts by dropping below the 43% it had allocated in this year’s first half. Chief Financial Officer Harvey Schwartz indicated the firm could further reduce the ratio, which was 44% in 2012’s first nine months and ended that year at 38%.

UBS, Barclays

“We’ll look at all the components: competitive dynamic, performance and, of course, shareholders and ROE,” Schwartz, 49, said on a conference call with analysts earlier this month, referring to return on equity.

Credit Suisse cut compensation costs at its investment bank by 17% in the first nine months of the year, while Zurich-based UBS AG reduced its investment bank personnel expenses by 7%, even as revenue jumped 22%. Frankfurt-based Deutsche Bank AG cut its pay pool for bankers and traders by 13%, while London-based Barclays Plc’s investment bank compensation fell 4%.

Citigroup, which doesn’t break out those costs for its divisions, said total expenses in its investment bank were down 3% from a year earlier, driven by job cuts and “lower performance-based compensation.” Bank of America, which also doesn’t detail pay costs, has done a “good job” of keeping expenses in check in its trading unit, CFO Bruce Thompson said this month.

Reaching Limits

Compensation costs include salaries, bonuses, benefits and the amortized expense of previous years’ deferred pay. The difference between the costs recorded on the income statement and what the bank actually hands out has led some firms including Bermuda-based Lazard Ltd. to report “awarded compensation” in addition to the accounting-expense figure.

Bankers may not feel the full brunt of shrinking compensation expenses this year because part of the decline will come from a drop in costs deferred from previous years, according to Brennan Hawken, a UBS analyst. He estimated that the five U.S. banks will recognize $10 billion of costs from previous years’ pay in 2013, down from $10.8 billion in 2012, with Charlotte, North Carolina-based Bank of America posting the only increase.

Limited Room

Banks may have limited room to push more of the expense of this year’s pay into future years, Jolson said. Morgan Stanley deferred 100% of bonuses for employees who made more than $350,000 and had bonuses exceeding $50,000 for 2012, people briefed on the matter said in January. Goldman Sachs and JPMorgan have largely eschewed using deferred cash as a way to reward employees while lowering the current year’s cost.

“I don’t think you can go much further,” Deloitte’s Dicks said. “For an employee whose paycheck has relation to their spending, the deferrals are now real, and they have an impact.”

Wall Street’s bonuses probably will hinge on firms’ fourth- quarter performance, Goldman Sachs President Gary D. Cohn said last week in a Bloomberg Television interview with Stephanie Ruhle. He said he’s “cautiously optimistic” for his company’s earnings in that period.

“To the extent that firms have decent fourth quarters, I think bonuses will be somewhat in line with last year,” said Cohn, 53. “At Goldman Sachs, if we don’t have a good fourth quarter, bonuses will be down, because the one thing we have done and have committed to our shareholders is that our bonus payments will be directly correlated to our revenue.”

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