If This Won't Kill the Bonus, What Will? (New York Times)

By Andrew Ross Sorkin

RIGHT away, Henry A. Waxman lit into Richard S. Fuld Jr. on the one issue that most inspires a passionate debate: executive compensation.

Mr. Waxman, chairman of House Committee on Oversight and Government Reform, was running a hearing on Capitol Hill on Monday about the latest series of bank failures. He started his questioning of Mr. Fuld, Lehman Brothers' chairman, not by asking about what led to the firm's bankruptcy, but by pointing at a chart showing that Mr. Fuld had made some $480 million between 2000 and now.

"That's difficult to comprehend for a lot of people," said Mr. Waxman, a Democrat from California. "I have a very basic question, ‘Is this fair?' "
Richard S. Fuld Jr. of Lehman BrothersRichard S. Fuld Jr., head of Lehman Brothers, at a Washington hearing on Monday. Doug Mills/The New York Times

It is a question that has long been asked of Wall Street, with its celebrated seven- and eight-figure bonuses, but little has changed over the years. Now, with the rapid reshaping of the financial industry over the past month, calls to rein in executive compensation may become louder than ever — and this time they may come not just from Washington, but from a more austere Wall Street itself.

The culture around Wall Street's all-important bonus — what Michael Lewis described in "Liar's Poker" as "the final summing up" — has always been shrouded in a certain sense of mystique.

Wall Street denizens are supposed to be part of a high-risk, pay-for-performance ethos. Base salaries for senior managing directors are often no more than $200,000. The eye-popping money is supposed to come at year's end, after the profits have been tallied.

At its peak, in 2006, Goldman Sachs gave away $16.5 billion in compensation, an average of $623,418 for each employee.

Of course, the opposite is also supposed to be true: when profits come down — or are nonexistent — bonuses are supposed to plunge, too. There has been an unusual understanding between investment banks and their shareholders that most firms will spend 40 to 50 percent of their revenues on compensation, perhaps the only industry in the word with such a high ratio.

With Wall Street in the doldrums, bonuses for 2008 could drop 50 percent from the previous year, rivaling the fall in 2003, Thomas P. DiNapoli, the New York State comptroller, predicted last week. He said he expected 40,000 employees on Wall Street to get pink slips. You can extrapolate those numbers across the nation's finance industry and start to understand why the stock market keeps falling. (To make matters worse, for every person in finance who loses a job, Mr. DiNapoli said, three other people are laid off.)

The bigger question might be why there will be bonuses at all.

After all, even if bonuses fall 50 percent, that hardly matches the drop in profits and revenues plaguing Wall Street. At Lehman Brothers, the employees still left are expected to receive $3.5 billion in bonuses from the firm's new owners, Barclays Capital and Nomura.

In a system where huge profits bring huge rewards and huge losses bring, well, smaller rewards, can you blame Wall Streeters for taking big risks in hopes of getting the brass ring?

Take a look at what happened to banks in 2007: Citigroup, for example, reported a profit of $3.6 billion, down 83 percent from the previous year. Many other firms saw similar declines. Yet bonuses across Wall Street declined only 4.7 percent from the year before. The payout was $33.2 billion, according to Mr. DiNapoli.

Of course, bonuses at big banks these days come in both cash and stock.

Mr. Fuld of Lehman may theoretically have been awarded $480 million at the time of his payouts — he called that figure inaccurate on Monday — but he didn't get much money out. Indeed, Mr. Fuld was such a believer, he didn't sell a share of stock after the summer of 2007, riding Lehman's price tag all the way down; right after the company filed for bankruptcy protection, he cashed in stock for less than $500,000. (Those shares were worth $247 million last year.) "The majority of my compensation came in stock," he said at the hearing. "The vast majority of the stock that I got I still owned at the point of our filing."

It is a refrain heard all across Wall Street. A longtime banker at Citigroup who held on to his stock said, "You don't have to cry for me, but I've been paying to work here for the last three years."

At UBS, bonuses last year were almost all in stock; no employee received more than $750,000 in cash, and most received less; the rest was in restricted shares. That is still an extraordinary amount of money, but given the costs built into many bankers' lives — mortgages, private school and so on — the money can quickly run out.

At Bear Stearns, where employees owned a third of the company's stock, the losses were particularly painful. Interestingly, at Goldman Sachs, where profits have continued to be plentiful, the firm has a culture in which employees tend to sell their Goldman stock to diversify their holdings as soon as they can.

Hedge-fund managers may actually be the hardest hit this year. With their funds down, they are not allowed to get a bonus. They really are paid for performance. Not only do they get no bonus this year, most have to make back the money they lost before they can take any bonus next year.

Indeed, some critics of Wall Street's pay system may start calling for "clawback" provisions, in which bonuses from previous years can be forfeited if profits later evaporate — a measure that isn't likely to become reality.

Over the years, though, Wall Street's appetite for big paychecks has endured through fat times and lean. Here's how Mr. Lewis, in "Liar's Poker," once described the scene of bankers learning what the year's bonus would be:

"The look on their faces was always the same no matter what the size of their bonuses: They looked sick to their stomachs. It was as if they had eaten too much chocolate pie."