As Cash Bonuses Decline is Total Compensation Reduced
March 4, 2011
Wall Street firms cash bonuses (includes cash incentives) have swiftly declined since 2006 as reported by NYC Comptroller, Tom DiNapoli, over past few years through press releases:
Although cash bonuses have declined, does this suggest total compensation is reduced or rather “slices of the total compensation pie” are being recalibrated. In response to criticism that Wall Street firms were overemphasizing short-term results by paying out large cash sums over a 12-month measurement period, many firms have gone ahead and recalibrated short-term cash compensation elements to long-term compensation vehicles like ISOs, RSA and Deferred Plans. On 01/20/11 Morgan Stanley reported the average for all employees’ deferred pay rose to 60 percent from 40 percent in 2009. Changing pay practices that have evolved over the past 25 years in a matter of 2-3 years is not for the “faint hearted”. The chart below shows bonuses increased 10 fold during this 25 year period for Wall Street firms.
Meanwhile feedback from across the Atlantic in the UK suggests that Big Bank employees feel such changes are “takeaways” and may end up costing the firms more in the long run as Megan Murphy from the Financial Times reports:… a study by PwC, the professional services firm, and the London School of Economics suggests that the longer employees are made to wait for pay, the less it is worth to them. Asked whether they would prefer a 75 per cent chance of receiving £250,000 immediately, or a 75 per cent chance of receiving £400,000 in three years' time, more than half the 100 executives surveyed chose the smaller sum.
Making changes to the compensation programs for the Big Banks will require a collaborative approach involving employees, the Board, and shareholders; transparent communications regarding purpose and intent, contingencies to monitor and realign plan design ensuring changes are effective, and staying on top of new regulations impacting these programs.