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Wall Street bonus backlash brewing

Big banks face a difficult decision over bonuses this year. Some experts claim that the old way of compensating workers may soon have to change.

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By David Ellis, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Wall Street now has a new worry: bonus season.

There are already rumblings that the notoriously lavish payments for bankers and traders could be cut in half from a year ago, following what has been an abysmal year for the securities industry.

Just a year ago, the bonus pie was worth about $33.2 billion, which broke down to an average of $180,420 for the more than 180,000 individuals employed by Wall Street firms at the time, according to the New York State Comptroller's office.

At the same time, opposition to big bonuses has snowballed in recent weeks after Congress effectively saved some of the country's biggest financial firms from certain disaster.

Lawmakers on both sides of the aisle - including House Republican Leader John Boehner, R-Ohio, and House Financial Services Committee Chairman Barney Frank, D-Mass. - put the first nine banks and securities firms that received a government capital injection on notice that they will not tolerate companies using the money to pay bonuses.

Similarly, New York state Attorney General Andrew Cuomo has demanded information about this year's bonuses from many of these companies, which include Goldman Sachs (GS, Fortune 500), Morgan Stanley (MS, Fortune 500), Citigroup (C, Fortune 500) and JPMorgan Chase (JPM, Fortune 500).

But compensation experts say they are hard-pressed to believe that most finance pros won't get a payday this year.

"You've got to pay the army that is generating the results for the organization - there is no question about that," said Dave Swinford, president and CEO of the compensation consulting firm Pearl Meyer & Partners.

The same may not necessarily be said for the industry's top executives. Some could forgo their payday in order to avoid a hellish backlash from both politicians and taxpayers.

Top level executives at Deutsche Bank (DB), including Chairman Josef Ackermann, already agreed to give up their bonus payments this year.

A handful of execs did that last year as troubles began to mount in the industry, including Morgan Stanley Chairman and CEO John Mack and then-Bear Stearns chief James Cayne. Cayne gave up his bonus a few months before the firm was ultimately absorbed by JPMorgan Chase.

"I think all of the most senior executives are thinking hard about what the right thing is for the organization and, frankly, for themselves in the long run," said Swinford.

Changes ahead?

Annual bonuses are hardly a phenomenon unique to Wall Street, but certainly no other industry has faced such skepticism about the practice.

That's due in large part to the size of the payouts given out in recent years.

Last year, Goldman Sachs (GS, Fortune 500) chief Lloyd Blankfein enjoyed a windfall of nearly $68 million for helping his firm avoid many of the toxic mortgage assets that ultimately sank rivals such as Bear Stearns and Lehman Brothers. Nearly two-thirds of that payment came in the form of restricted stock and stock options, while the remainder - roughly $26.8 million - was cold, hard cash.

Morgan's Mack enjoyed a whopping payout of more than $40 million in 2006, while former Lehman CEO Richard Fuld was awarded $11 million in restricted stock that same year.

Some critics have charged that the current compensation model, which took root in the 1980s, helped fuel the excessive risk-taking that contributed to the credit crisis.

While financial firms are unlikely to make any changes to that payment model this year, compensation experts believe that changes could soon be forthcoming.

Tim Bartl, vice president and general counsel at the Washington, D.C.-based Center on Executive Compensation, said he could envision Wall Street firms making a shift towards higher salaries for employees or bigger equity stakes in the form of restricted stock or options instead of large cash bonuses.

There's also the possibility, he noted, that some firms could employ some sort of deferred compensation plan aimed at preventing employees from getting paid for bets that ultimately come back to haunt the company years later.

There are concerns, however, that changes to how compensation and bonuses are paid out could signal another major modification to an industry that has undergone a major transformation in the last two months.

One of the biggest risks is that top talent, knowing that their bonus is capped, could head for more lucrative opportunities, notes Alan Johnson, whose compensation consultancy firm Johnson Associates tracks compensation trends in the financial services industry.

But with hedge funds and private equity firms suffering alongside the big banks, it remains to be seen if Wall Street workers could indeed find the kind of wallet-busting payday they have grown accustomed to elsewhere.

Johnson warns that a change in the way bankers and traders are paid could also spell trouble for the companies that employ them. Should a bank have a difficult year, they would still be obligated to pay hefty salaries.

"It cuts both ways," said Johnson. "The question is how do you do it without destroying the business?" To top of page

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