March 5, 2013

Bonus Season’s Cash Payouts ‘De Minimis,’ Expert Says

The latest figures don’t make an ugly picture for Wall Street employees any prettier

Wall Street bonuses should be up about 8% this season and total $20 billion, according to New York State Comptroller Thomas DiNapoli. But experts caution that this increase doesn’t necessarily translate into much these days for advisors.

“Bonus season used to make a difference in the lives” of wealth managers and others, said Howard Diamond, managing director and chief operating officer of Diamond Consultants, a recruiting and consulting firm in Chester, N.J., in an interview with AdvisorOne. “Now, with a de minimis amount being paid in cash and wealth managers waiting for longer periods of time to receive these awards,” that’s no longer the case, he says.

“You can say that the large firms are giving bonuses to wealth managers but little of it is upfront,” explained Diamond.

“It’s a bit illusory, as there are few wealth managers that get real money in their hands,” the recruiting specialist added. “They can wait, of course, but what if they are not there through the vesting period through no fault of their own?”

Bonuses on Wall Street, as tracked by New York’s comptroller, peaked in 2006 at $36.3 billion, when the average bonus topped $191,300, and the total bonus pool hit nearly $23 billion in 2010, when the average bonus was close to $139,000. The estimated average per employee for 2012 (paid in early 2013) is about $121,900.

This data reflects both cash payments and deferred compensation for which taxes have been paid. Stock options and other deferred compensation, though, are not included.

Deferred comp is an increasing way that bonuses are paid to those who stay with a firm through the vesting period, experts point out.

Morgan Stanley (MS), for instance, decided in mid-January that employees who made more than $350,000 a year, like traders and investment bankers, and who were set to receive cash bonuses of $50,000 and up would have these payments deferred and also paid out with both cash and stock, a Reuters report said. This plan does not affect financial advisors; however, industry experts considered it a warning shot for the industry.

“In 2011, when the bonuses totaled $18.5 billion, one could assume that the $4.5 billion drop from 2010 may have stemmed from increased deferred compensation being given as a proportion of total compensation,” said compensation consultant Andy Tasnady of Tasnady Associates in Port Washington, N.Y., in an interview.

“In other words, in 2011 maybe firms awarded the same $23 billion in bonuses as in 2010, but paid out $18.5 billion in cash in 2011 and added $4.5 billion in deferred comp awards to be paid out over the next three years," explained Tasnday. "This then would make the 2012 reported increase actually flat as far as new cash awards.” explained Tasnady. So, it would initially look like 2012 bonuses are up, but it’s really just the same award level combined with a deferred-comp award from the earlier year that came due.”

Even with these caveats, Tasnady and Diamond say that—as the comptroller reported—Wall Street firms have some deep pockets these days.

“It’s no surprise bonuses figures are rising,” said Diamond. “Wall Street firms are doing very well, with the stock market way up and quarterly earnings at high levels, too. But it’s worth remembering that earnings are going up via rounds of layoffs as firms cut back on overhead.”

In the short run, Tasnady points out, a firm’s profit-and-loss statements "actually benefit from an increase in deferred-compensation proportions, since this reduces the short-term expense line." Wall Street firms report the deferred compensation only as it vests to the employee, he notes: "So if deferred proportions have been increasing in recent years, it has contributed some of the short-term profitability boosts to the financial sector."

According to the New York State Comptroller, 2012 profits were $23.9 billion for Wall Street firms vs. $7.7 billion in 2011. They topped out at $61.4 billion in 2009.

“The happy numbers describing bonuses that are up and industry profitability that's rising conceal the fact that this has been achieved in part because of wide-ranging layoffs that have dramatically reduced headcount,” said Mark Elzweig, head of an executive-search consultancy in New York, in an interview.

Plus, the bonuses numbers are inflated, Elzweig says, by the fact that more was paid out in 2012 to avoid 2013 tax increases. And don’t look for much good news ahead, he adds.

“The fact is that going forward, Wall Street firms will hire in a more strategic and judicious manner,” Elzweig said. “Many of the new jobs are likely to be in compliance as opposed to revenue-generating areas like trading and investment banking.”

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