Bonus season is fast approaching on Wall Street, but this year the talk does not center just on multimillion-dollar paydays.
It's about a new club that no one wants to join: the Zeros.
Drawn from a broad swath of back-office employees and middle-level traders, bankers and brokers, the Zeros, as they have come to be called, are facing a once-unthinkable prospect: an annual bonus of...nothing.
"It's going to a cause a lot of panic on Wall Street," said Richard Stein, president of Global Sage, an executive search firm. "Everybody is talking about it, but they're ac- tually concerned about it be- coming public. I would not want to be head of compensa- tion at a Wall Street firm right now."
In some ways, a zero bonus should not come as a surprise to many bankers. As a result of the 2008 financial crisis, Wall Street firms such as Goldman Sachs and banks such as Citi- group raised base pay substan- tially in 2009 and 2010. They were seeking to placate regula- tors who had argued that big bonuses based on perfor- mance encouraged excessive risk-taking.
At Goldman, for instance, the base salary for managing directors rose to $500,000 from $300,000, while at Morgan Stanley and Credit Suisse, it jumped to $400,000 from $200,000.
"Base salaries have moved up, so there is less money over all in the bonus pool this year," said Glenn Schorr, an analyst at Nomura, the Japanese bank.
"So to make the math work, some people will be getting small or no bonus this year."
Even though employees will receive roughly the same amount of money, the psycho- logical blow of not getting a bonus is substantial, especially in a Wall Street culture that has long equated success and prestige with bonus size.
So there are sure to be plen- ty of long faces on employees across the financial sector who have come to expect a bonus on top of their base pay. Wall Streeters typically find out what their bonuses will be in January, with the payout com- ing in February.
One executive, whose firm prohibited discussing the topic with the news media, said the bump in base salaries had con- fused people, even though their overall compensation was the same. "People expect a big bonus," this person said.
"It is as if they don't even see their base doubled last year."
Dealing with the Zeros can be complicated. "It's a real headache," said a senior bank- er, who asked not to be identi- fied because the topic is so vol- atile at his company. There has been so much grousing that in some cases, he said, "we'll throw $20,000 or $25,000 at each of the Zeros so they're not discouraged".
"No matter what we pay people, it is never enough and they always find something to complain about," this banker said.
While Zeros are turning up in the ranks of back-office em- ployees and mid-tier bankers and traders who typically earn $250,000 to $500,000, their bosses way up the compensa- tion ladder are still expected to notch handsome paydays in the millions.
In terms of overall profit, Wall Street is on track for one of its best years ever, although it will trail 2009, which was pumped up by federal bailout money and the rebound from the financial crisis.
In the first three quarters of the year, Wall Street earned $21.4 billion, putting it on track to easily outpace 2006, when the economy was boom- ing, and well ahead of the New York City government's initial estimate of $20.6 billion for profit in all of 2010.
This year, Wall Street's five biggest firms have put aside nearly $90 billion for bonuses.
But bankers and compensa- tion experts say bonus payouts will vary widely this year, much more than in the past when a rising tide lifted all boats. And just as junior and senior bankers face varying fates, so some departments are expected to fare better than others.
At JPMorgan and Bank of America Merrill Lynch, for ex- ample, the leveraged finance group could receive a 10-20% bump from last year, because of record issuance of junk bonds. Equity traders, on the other hand, are looking at a 10-20% drop because stock trading tailed off during the second half of the year.
At Morgan Stanley, equity trading was stronger, but bond traders are most likely looking at smaller pay packages.
To be sure, the best perform- ers on the most profitable desks will still receive substan- tial bonuses. At Bank of Amer- ica, top directors might earn a $1 million bonus while top vice presidents could net $600,000, according to one banker there.
What's more, echoing trends in the broader economy, Wall Street chief executives are al- most certain to escape the fate of the Zeros, with bonuses climbing into the stratosphere as the shock of the financial crisis fades and pay for the top tier climbs back toward histor- ical averages.
Morgan Stanley is perhaps feeling the most pressure. In 2009, it paid out a record 62% of its net revenue in compen- sation and benefits; its chief executive, James P. Gorman, vowed to bring that down to bolster profits. But early this year, the firm's board decided to start hiring in an effort to re- build businesses in the wake of the financial crisis.
Now, having added 2,000 people in 2010 yet lacking any growth in revenue, the firm has little choice but to scale back on bonuses. Compensa- tion will be lowered across the board, but there will still be plenty of Zeros, said one per- son familiar with Morgan Stan- ley's compensation process.
Recently, Gorman has been telling employees that the selective, short-term pain on compensation will give the firm credibility with share- holders and help Morgan Stan- ley over the long haul, calling 2010 "the year of differentia- tion", several employees said.
Even if overall salaries for Wall Streeters remain gener- ous, the new zero-bonus cul- ture is likely to change spend- ing habits, said Robert J. Gor- don, a professor of economics at Northwestern. Bonuses are spent differently than more predictable income, he said, citing "impulsive purchases, like jewellery from Tiffany's for a girlfriend".
Zero bonuses are likely to have a bigger impact on New York's economy, which has grown dependent on the lar- gess of Wall Street firms.
Whether it's for jewellery, high-end clothing or apart- ments, bonus spending has long fed a post-holiday boom in January and February, espe- cially in Manhattan and ex- pensive suburbs such as Greenwich.
"I suspect there will be some pain in the short term," said Robert Yaro, president of the Regional Plan Association, an independent research group in Manhattan.
"We've all heard the stories of someone showing up in Greenwich to buy a $10 million house and paying cash on the spot," he added. "But in the long term, this is probably healthier for Wall Street and the regional economy. Wall Street shouldn't be a casino."
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