Your bonus is safe, your boss' isn't
Bear Stearns' James Cayne and Morgan Stanley's John Mack aren't getting them, but Wall Street bonuses aren't disappearing.
NEW YORK (CNNMoney.com) -- John Mack isn't getting one this year. Neither is James Cayne.
But the subprime mess and the red ink it spilled throughout the canyons of Wall Street hasn't washed away the bonuses that are staples of compensation packages at financial services firms.
In fact, the New York State Comptroller's office forecasts that the overall bonus pool will drop no more than 10 percent from the record level of $23.9 billion in 2006, despite an estimated drop in investment bank earnings of about 24 percent, according to earnings tracker Thomson First Call.
For most professionals up and down Wall Street, a difficult 2007 will end with a bonus check - perhaps smaller than a year ago - but lucrative nonetheless.
The firm reported the total of both employee salaries and bonuses rose 23 percent this year to $20.2 billion. CEO Lloyd Blankfein reportedly is in line for a $70 million bonus, which would best the previous record bonus of $54 million he received in 2006.
But other top firms haven't done as well as Goldman, with Morgan Stanley (MS, Fortune 500) and Bear Stearns (BSC, Fortune 500) both reporting their first quarterly loss in those fabled firms' histories this week. Citigroup (C, Fortune 500) and Merrill Lynch (MER, Fortune 500) are expected to report large losses when they report their fourth-quarter results early next year. Larger than expected writedowns already caused both those firms to replace their chief executives.
Morgan Stanley CEO Mack and Bear Stearns CEO Cayne were able to hang onto their jobs, but both firms announced they would go without bonuses this year - components which are central to both men's compensation packages. The Bear Stearns executive committee is also going without bonuses.
"We designed our executive compensation programs to pay for performance," said a Bear Stearns statement explaining the zero bonus for its top executives. "In a year in which we produced unacceptable results, the plans are working as they were designed."
Mack received no cash bonus a year ago, but received stock and options worth an estimated $40.2 million, which was 50 times greater than his $800,000 base pay.
Cayne received a bonus of $33,600,000 in 2006, which dwarfed his base pay of $250,000.
Compensation experts say it's smart for those executives to have scrapped their bonuses, especially since most of the professionals at those firms will be taking home smaller bonuses this year.
"I think it's a good gesture, both for the shareholders and the professionals who work for them," said to Options Group Director Eric Moskowitz. "No bonus is a real sign these guys want to make things right and sending a signal that they're not satisfied with results."
But going without a bonus will likely be limited to a relatively small group of top executives at the firms.
"The closer you are to Mack or Cayne, the bigger the haircut you just took," said Brent Longnecker, chief executive of Longnecker & Associates, a corporate compensation associate.
The compensation experts say that even in the divisions within the investment banks that ran up large losses, such as fixed income, there will be bonuses for top producers, even if those employees will be taking home quite a bit less this year.
"They'll make sure they've got a retention bonus plan in place," said Longnecker, who said the managers at the firm realize these employees stopped losses from being worse than they were.
"These top performers can get an attraction bonus real quick if they go someplace else," said Longnecker.
The experts say one reason for the top executives to give up their bonus payments this year is to have more money to spread around and pay to top performers.
At the firms that took a big subprime hit, almost no one will escape some cut in bonus payments this year, even if their own performance, or the profits from their division, outperformed targets, according to Longnecker.
While bonuses are common throughout corporate America, they are a far bigger part of overall compensation for all levels of employee pay on Wall Street than they are at a typical corporation.
Tom McMullen of the Hay Group, a human resources and management consultant, estimates that cash bonuses typically equal between 40 and 100 percent of base salary for top executives on Wall Street, while senior managers receive between 15 to 30 percent of base pay as bonus payments. Even entry-level employees might see 10 to 20 percent of their base pay in the form of a bonus.
Longnecker said he believes management at both Morgan Stanley and Bear Stearns made the decision to forgo bonuses, without it being pushed on them by the compensation committees of the firms' boards, although he added, "The compensation committee probably feels relieved they did so."
And he said that as much as Mack and Cayne saw their bonuses reduced, it was limited compared to the huge declines in their net worth this year from the drop in the value of their stock and options.
Both firms are off nearly 50 percent from their highs of earlier this year, a drop that cost Mack about $146 million off the value of his stock and options since July, and cost Cayne a whopping $571 million in the value of his holdings since February. Still that leaves Mack with $177 million in Morgan Stanley stock and options, and Cayne with about $617 million in Bear Stearns shares and options.