Wall Street Boosts Compensation - 14% Average Increase in 2007

By Mike Caggeso
Associate Editor

The subprime mortgage crisis helped send many investors on a wild ride in 2007, but that didn't stop some Wall Street investment bankers from giving themselves a hefty raise.

Four large New York-based firms - Goldman Sachs Group Inc. (GS), Morgan Stanley (MS), Lehman Brothers Holdings Inc. (LEH) and The Bear Stearns Cos. (BSC)  - are paying $49.7 billion in total compensation (salaries, benefits, and bonuses) for the year, an increase of 14% from the $43.5 billion paid last year, Bloomberg News reported. Year-end bonuses [traditionally about 60% of the total compensation figure] also rose 14%, from $26.1 billion in 2006 to $29.8 billion for 2007.

Big bonus payouts have been part of the Wall Street culture since the leveraged-buyout-supercharged days of the 1980s, chronicled in such best-selling books as "Barbarians at the Gate" and "Liar's Poker," and in such hit Hollywood films as Wall Street. The bonuses always spur controversy and attract headlines, but when they are paid out during less-than-stellar years for stocks the payouts can spawn substantial investor ire.

Three of the four firms cited in the Bloomberg report have recently posted billions in write-downs and recorded massive quarterly losses. Indeed, Morgan Stanley shares have declined 34.52% this year. Lehman Brothers' shareholders have lost 17.91% year-to-date. And Bear Stearns shares retreated 46.12% in 2007.

Only Goldman investors pocketed a profit - a slim 6.32% - but any gain is a testament to sound management during such a turbulent year for the financial markets.

By comparison, the Dow Jones Industrial Average has returned 7.19% so far this year. The tech-laden NASDAQ Composite Index has returned 10.83%, while the broader Standard & Poor's 500 Index has returned 4.09%.

Some investors take comfort in the fact that two CEOs - John Mack of Morgan Stanley and Jimmy Cayne of Bear Stearns - agreed to forego their annual bonuses due to their respective companies' poor performance this year. But when you consider the generous total compensation packages the executives enjoyed according to the most recent published figures - $37 million for Mack and $38 million for Cayne - the refusal of a 2007 bonus seems a bit less noble.

In addition to Cayne, Bear Stearns announced that none of the executive committee members would receive annual bonuses, as write-downs caused the 84-year-old company to record its first-ever quarterly loss in its fourth fiscal quarter. As a result, the company reduced overall compensation by 21%.

"When Bear Stearns became a public company, consistent with our entrepreneurial roots and to ensure alignment of interests between management and shareholders, we designed our executive-compensation programs to pay for performance. In a year in which we produced unacceptable results, the plans are working as they were designed - and the members of the executive committee will not receive any bonuses for 2007," Cayne said in a statement.

The largest U.S. securities firm, Goldman Sachs, was one of the few financial institutions to post a gain this year and its management has been rewarded accordingly.  Chief Executive Officer Lloyd Blankfein will receive a year-end bonus package [a combination of cash, restricted stocks and options] worth $67.9 million, a 26% increase over his 2006 annual bonus.  His total compensation package for 2007 sets a new record for a Wall Street firm.

"This year has really separated the pack,'' Gary Goldstein, chief executive officer at New York-based financial recruiter Whitney Group, told Bloomberg. "In the face of what could have been a disastrous year for Goldman Sachs, they had the best year ever and [Blankfein] deserves to be recognized for that."

Merrill Lynch & Co. Inc. (MER), recent recipient of a much-needed cash infusion from Singapore's sovereign wealth fund Temasek Holdings, is scheduled to report 2007 results next month.

News and Related Story Links:

  • Associated Press:
    Bonuses on Wall Street surge 14 percent