Wall Street Bonus Picture Goes From Bad to Worse

With each passing day, the forecast for Wall Street bonuses only grows worse. In less than two weeks, Morgan Stanley and Goldman Sachs will tell their bankers and traders how much they will receive in annual bonuses for one of the worst years ever for the securities industry. Bonuses represent the bulk of a Wall Streeter's compensation and in a good year could reach anywhere from $500,000 to several million dollars for a top producer.

Yet executives face a backlash against lavish pay after world governments put trillions of taxpayer dollars at risk to keep banks from failing. That pressure, combined with evidence that losses are continuing to mount and that revenue is falling hard, is expected to shrink payouts.

"It's a very tough year. People who still have jobs have to reset their expectations," said Eric Moskowitz, a compensation consultant at Wall Street recruiting firm The Options Group.

Compensation experts a month ago estimated that the biggest investment banking companies would slash annual bonuses by 50 percent, on average, and by more in businesses gutted by the breakdown in global markets.

Conditions have only grown worse in recent weeks. Fourth-quarter results are expected to be abysmal, while the layoffs keep piling up. Banks and insurers have announced about 200,000 job cuts since banks began experiencing problems with mortgages and other credit last year.

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• Job Losses: A Sector-by-Sector Breakdown

Gray skies turned even darker this week as several analysts told clients that Goldman Sachs Group, one of the few firms that avoided major losses throughout the credit crisis, could post more than $2 billion in fourth-quarter losses fueled by nearly $9 billion in writedowns. Morgan Stanley also is expected to report a loss.

On Thursday, Credit Suisse announced it would slash 5,300 jobs, or 11 percent of its staff worldwide, a day after U.S. middle-market leader Jefferies Group slashed 10 percent of its workforce and closed some emerging-market offices.

More broadly, some 1.9 million Americans lost jobs this year, the biggest drop since 1974. The U.S. unemployment rate rose to 6.7 percent last month, the highest since 1993, the government announced Friday.

Rose Marie Orens, a compensation consultant at Mercer , said boards of directors have been tougher on pay this year, mindful of industrywide layoffs and a congressional spotlight on Wall Street greed.

"Everyone at the banks are really wrestling with what to do. To some degree, they're still focused on the upper levels of the house," Orens said. "But it's literally a day-by-day situation, but the numbers aren't getting any better."

Even private equity and hedge fund firms like Carlyle Group, which during the boom years drove up pay by competing for top bankers and traders, are in cost-cutting mode. Options Group recently told clients the average bonus will be down by half from 2007, though there is wide variance between businesses and regions.

Profound Changes

Depressed areas like convertible bonds, investment banking, equity derivatives and structured credit will face sharply lower bonuses.

Shaun Springer, chief executive of London recruitment firm Napier Scott, noted foreign exchange and private banking have had good years and so should see relatively strong bonuses. "The way the bonus pool is divided is going to be much more polarized between the top 10 percent and the other 90 percent," he said.

Location also makes a difference. The Middle East is unlikely to see major cuts in bonuses, as opposed to sharper declines in New York, followed by London and then Asia.

"There are still many that have to wake up to the very profound changes occurring," Springer said. "Aside from the fact that there's significantly less money to go around, the whole bonus concept is under severe question."

Senior executives at Deutsche Bank , Goldman, UBS and Credit Suisse have responded to popular outrage by denying themselves bonuses this year. Other banks that benefited from government bailouts are expected to follow suit.

Beyond social and political pressure, bonuses will be dictated by revenue and earnings -- which are expected to be ugly.

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• Morgan Stanley Widens Goldman Sachs Loss Forecast

Goldman, which last year set profit and compensation records, will see 2008 net revenue fall 45 percent to $25 billion while compensation drops 35 percent to $13 billion, according to Fox-Pitt, Kelton.

Atlantic Equities forecasts that Goldman's revenue will fall by more than half to $22 billion while the compensation pool shrinks by 45 percent to $11 billion. UBS said this week that Goldman's compensation would fall by half, forcing the bank to claw back some money set aside for bonuses earlier this year.

"Boards are going to have to make some hard calls," Orens said. "They're cutting costs, reducing the employee base and seeing more and more bad news. Boards are asking 'Why are we paying what we are paying, and how does it look?"'

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