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The mad, mad world of Wall Street bonuses

Posted Dec 21st 2006 7:29AM by Peter CohanPeter Cohan RSS Feed
Filed under: Good news, Management, Insiders, Employees, Morgan Stanley (MS), Rich in America, Goldman Sachs Group (GS)

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This year Wall Street bonuses are looking to hit a new record. Last year, they hit a record of $21.5 billion and I've seen estimates that they'll be up between 10% and 25% in 2006.

One expert, Options Group, estimates that the big winners will be investment bankers and equity underwriters and traders. Driven by a record year in mergers, investment bankers will receive bonuses 20% to 25% higher than in 2005, as will those in equity derivatives sales. The "losers" will be fixed-income proprietary traders, who will earn the same or less than they did in 2005.

This year, the best place for bonus babies is the Goldman Sachs Group (NYSE:GS), which is distributing $16.5 billion worth of bonuses among its 36,000 employees -- up 40% from 2005. While this averages out to $623,418 per full-time employee, a few traders will take home $100 million.

How can any company justify paying so much money to one person? That $100 million bonus is 2,159 times the $46,326 that the median U.S. family earns every year! Do traders really work 2,159 times harder than the average family? Are their lives really 2,159 more stressful? How can any CEO justify paying out so much money?

Here, in a nutshell, is one way to understand how those insanely high numbers are justified: The biggest bonuses are paid to the individuals whose loss to the organization would cost it the most profit. Goldman will pay $100 million in bonuses to traders who bet on the direction of the prices of oil and natural gas. This year, those traders bet correctly and Goldman made money as a result. Since half the bonus is paid in stock, Goldman's employees have benefited from the 58% rise in GS during 2006.

Goldman's CEO, Lloyd Blankfein, will do pretty well for himself too. He's slated to make $53.4 million -- 46% more than his predecessor Hank Paulsen (currently U.S. Treasury Secretary) earned in 2005. I'd say Blankfein deserves the increase. Goldman has grown faster under Blankfein than under Paulsen -- for example, Goldman's profit grew 70% in 2006, compared to a relatively slow 23% in 2005.

While its competitors have not come close to matching Goldman's performance, their bonuses are not too shabby. Lehman Brothers Holdings, Inc. (NYSE:LEH) will drop $335,441 on its employees -- 54% of Goldman's bonus pay; The Bear Stearns Companies, Inc. (NYSE:BSC) will disburse $321,740 per worker -- 52% of the Goldman level, and Morgan Stanley (NYSE:MS) will pick up the rear -- paying a bonus of $264,715 per employee -- 43% of the Goldman average.

But even though the bonuses can be sickeningly large to the the select individuals lucky enough to earn them, they do have broader benefits to the economy.

For example, with $24 billion in securities industry pay going to New York-based employees -- up 17% from 2005 -- the state and city will get their share. Specifically, $1.6 billion in taxes will go to the state and $500 million to the city. Moreover, anyone who sells high-end real estate, art, fast cars, cigars, and jewelry will benefit. So will charities -- like Robin Hood -- which is led by many of this year's bonus babies, including Blankfein.

Here are some more specific examples of how those bonuses are being spent:

  • A $50,000-plus ring will soon adorn a Wall Street wife's hand featuring two canary diamonds, yellow stones that are among the rarest available;
  • A New York real estate magnate wants a charter for June or July off Italy's Amalfi Coast for as many as a dozen of his family and friends, at a cost of about $175,000 per week for the boat and crew;
  • Marquis Jet Partners has sold more than 100 jet gift cards in the past month -- at $185,000 a pop. One Wall Street executive bought six, one each for his wife and five kids;
  • A New York beauty salon gets three calls daily for makeovers, at $10,000 to $20,000 each;
  • A Fifth Avenue plastic surgeon says he gets about 20 requests a year for plastic surgery or Botox anti-wrinkle treatments as gifts; and
  • One woman specifically asked for a $20,000 face lift as a gift from her husband this year, instead of clothing or jewelry.

That's trickle down economics for you!

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm, and a Professor of Management at Babson College. He has no financial interest in Bear Stearns, Goldman Sachs, or Lehman Brothers.

Tags: Bear Stearns, Blankfein, bonus, equity underwriters, executive compensation, Goldman Sachs, GoldmanSachs, GS, Hank Paulsen, investment bankers, Lehman Brothers, Lloyd Blankfein, Morgan Stanley, Options Group, Robin Hood, wall street bonuses, WallStreetBonuses

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