Bonuses grow on Wall Street

Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co.’s investment bank, survivors of the worst financial crisis since the Great Depression, are set to pay record bonuses this year.

The firms — the three biggest banks to exit the Troubled Asset Relief Program — will hand out $29.7 billion in bonuses, according to analysts’ estimates.

That’s up 60 percent from last year and more than the previous high of $26.8 billion in 2007. The money, split among 119,000 employees, equals $250,400 each, almost five times the $50,303 median household income in the U.S. last year, data compiled by Bloomberg show.

The three will award more in stock and defer more cash payments under pressure from regulators to tie pay to long-term results, compensation experts said. They may still face public wrath over the size of bonuses after the government injected capital into all the major financial institutions following Lehman Brothers Holdings Inc.’s collapse in September 2008.

“Wall Street is beginning to resemble Clark Gable as Rhett Butler in the film ‘Gone With the Wind’: ‘Quite frankly, my dear, I don’t give a damn,’” Paul Hodgson, a senior research associate on compensation at the Portland, Maine-based Corporate Library, said in an e-mail. “It doesn’t seem as if even political threat, disastrous PR, envy, rising unemployment rates and home repossessions is enough to get any of these people to refuse the bonuses they have ‘earned.’”

Bonuses for employees in fixed income will likely jump the most, 40 percent to 45 percent, while employees in asset management may see no growth in their year-end bonuses, according to a report from Options Group, a New York-based executive search and compensation consultant firm.

Average bonuses for employees at financial firms worldwide will rise about 35 percent to 40 percent this year, according to the annual report, which is set to be released this week. They will still remain below 2007 levels after dropping an average of 40 percent to 45 percent last year, the report said.

Managing directors in high-yield credit sales are expected to see some of the largest average increase in bonuses, a 50 percent jump to a range of $1.3 million to $1.7 million. The bonuses of directors in commodity sales units may also climb 50 percent to a range of $650,000 to $850,000, the report said. Managing directors in commodities trading will receive the largest bonuses for that level, an average of $4 million to $6 million each.

Global heads of equities, commodities trading, interest-rate trading and investment banking each will receive total compensation that may reach at least $10 million, most of it coming from bonuses, according to the report.

Morgan Stanley is among banks that are offering a larger portion of bonuses in stock and instituting so-called clawback clauses to tie incentive pay to risk, the report said. JPMorgan and UBS AG are also raising base salaries for some employees to reduce the share of bonuses in total pay.

“Wall Street is all about creating wealth, and when banks start making money again, they have to pay their people,” said Michael Karp, co-founder of Options Group. “But because there’s so much public scrutiny, people will be very sensitive in terms of putting caps on some of these cash figures, and you’ll see a lot more in stock.”

Securities firms typically use slightly less than half of their revenue to pay salaries, benefits and bonuses, a percentage that is adjusted throughout the year. In the first nine months, Goldman Sachs, Morgan Stanley and JPMorgan’s investment bank told their shareholders that they set aside $36.4 billion for compensation, up 27 percent from the same period a year earlier.

The three New York-based firms will likely set aside $49.5 billion for compensation for the full year, according to estimates from David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller in New York. That’s up from $30.9 billion last year and $44.7 billion in 2007.

The rise in compensation is led by Goldman Sachs, which had record profit in the second quarter. Its compensation expense is expected to more than double from last year to $21.9 billion, or about $691,000 per employee, according to Trone’s estimates. The expense at JPMorgan’s investment bank is expected to jump 55 percent to $12 billion, about $482,400 for each employee, while Morgan Stanley’s compensation cost will rise 27 percent to $15.6 billion, or $252,000.

Year-end bonuses usually account for about 60 percent of compensation, the Options Group report said. While the total this year is expected to be greater than in 2007, it will come to less per employee than the $256,000 paid out that year by the three firms because of increased staffing.