Working on Wall Street is expected to get a little more lucrative this year.
If you’re a trader and you don’t work for scandal-tarnished JPMorgan Chase (JPM) or Barclays (BCS), then you may see your bonus rise 5 percent to 15 percent if you trade stocks, and 10 percent to 20 percent if you specialize in fixed income. Bonuses in other parts of the Wall Street universe, according to a report from Johnson Associates, are likely to be flat to up to 10 percent higher, with gains in asset management, commercial banking, hedge funds and prime brokerage ahead of those anticipated in the worlds of private equity or retail banking. The losers? Investment bankers. Despite the Facebook IPO, underwriting activity has remained sluggish as has global mergers and acquisitions volume.
But while the forecasts for Wall Street bonuses may look upbeat in comparison to what is taking place elsewhere in the economy, those gains are more muted than Johnson Associates had anticipated only a few months ago. Since the compensation-consulting firm published its last estimates in the spring, the European sovereign debt crisis has put a further crimp on trading volumes and weighed on economic growth worldwide, which in turn has affected the ability and willingness of corporations to contemplate deals.
All that has already taken a toll on Wall Street’s revenues and profits; as Johnson Associates pointed out in its survey, forecasts for earnings for asset management firms, commercial banks and investment banks have been slashed over the course of the last year. At the commercial and investment banks it surveys, the consulting firm expects compensation and benefits to rise several percentage points this year to hit nearly 70 percent of pre-tax, pre-compensation net income.
The challenge confronting these institutions is how to keep their investors content, if not happy, by finding a way to boost profit levels so that compensation expenses – already a source of discontent in some quarters – don’t become an even bigger red flag at annual meetings next year than they were this year. Certainly, they don’t want to curtail bonuses going forward: Doing so in recent years has hurt morale among the bankers that firms like Goldman Sachs (GS) will want to transform into future leaders. So the pressure to boost profits and returns on equity – already intense – is likely to increase still more as the banks try to keep bonus levels as high as they can without arousing ire from their shareholders.
But perhaps it’s time to shift the debate slightly. Instead of focusing simply on how much Wall Street institutions will pay bankers and traders this year and next, let’s start thinking instead about the resources that we provide to the regulators charged with making sure that those institutions toe the line. As we have seen – over and over again – the pursuit of profits regularly leads them to either risk management snafus or to violate the laws. You don’t need to look too far to find some dramatic examples – HSBC’s alleged involvement in funneling drug money from one country to another; the “London Whale” trades at JPMorgan Chase; the LIBOR rate-rigging scandal, which is nowhere near coming to an end, it seems.
And yet, when something goes amiss, the result is predictable. Congressional hearings are called; the malefactors – the traders responsible and their bosses and the institution’s CEO – are summoned to be grilled in a self-righteous manner, sometimes by members of Congress who clearly don’t understand the products or strategies they are enquiring about, or who at times don’t even seem to grasp the nuances of the business itself. The result? Headlines, and populist outrage. Nothing that a skilled PR department can’t handle, eventually.
True, nobody wants to end up in the witness chair at a Congressional committee hearing – but it’s survivable. So, too, it seems, is overseeing the implosion of your firm. During the 12 months before MF Global collapsed last autumn, Jon Corzine – former Goldman Sachs CEO and former governor of New Jersey – took home some $8 million in salary, stock options and bonus payments. Even given that some of that has vanished in the form of legal fees and that the stock option grants have expired without value, Corzine has fared better than many investors. And even after admitting publicly that he had no idea where the money that MF Global was supposed to be holding in client accounts had gone to, it now seems as if Corzine himself won’t face any charges.
Here’s a thought: Wouldn’t it be nice to start thinking about bonus payments for regulators – for the folks who are responsible for monitoring Wall Street – that compare with those on Wall Street itself? I’m not suggesting that they be as lavish as those awarded to top traders – after all, Wall Street compensation is so high in part because the jobs offer precious little in the way of security, especially when contrasted with government work. But we should want some of the best people on Wall Street to find working for the government attractive enough that the departments or agencies responsible for overseeing financial giants find it easy to recruit the foxes that are most skilled at protecting the chicken coop. Why wait until we have another MF Global; another London Whale; another LIBOR scandal? Instead, why not find a way to attract Wall Streeters to cross party lines and help to prevent such occurrences in the future? Surely the increased confidence in the health and integrity of our financial system would be worth the investment.
Please note: this isn’t a suggestion that all SEC or CFTC officials, or those at other agencies, deserve bigger salaries. After all, what motivates someone on Wall Street isn’t the salary, but the bonus. And those on the Street know that the salary is shaped by how well they do; in other words, how much profit they are able to generate for their institution. Let’s turn that around a bit, and think about how bonuses in the regulatory arena might be structured. Perhaps someone earns a bonus when by spotting an insider-trading scheme in its early stages; by beginning an investigation into unusual trading patterns before a rogue trader costs an institution billions of dollars? Effective regulation means prevention, not just punishment.
And while we’re pondering extending Wall Street’s approach to compensation to the public sector, why not include the idea of clawbacks? When a denizen of Wall Street has overseen the destruction of a firm – wittingly or unwittingly – his compensation now will be “clawed back” under the increasingly popular provisions adopted by a majority of Wall Street firms. But what about the regulators? If there’s a blowup on their watch, that they missed opportunities to catch before it became a systemic crisis, they, too, could forfeit some of their own compensation. Think, for instance, of the opportunities that the SEC had to stop Bernie Madoff’s Ponzi scheme in its tracks.
Of course, it’s not that simple. But finding a way to both reward and penalize Wall Street’s regulators in the same way that its employees are rewarded and penalized doesn’t just appeal because it has a degree of symmetry. It may serve as an interesting starting point for discussion the next time the whole question of Wall Street compensation hits the headlines.