Annual Wall Street Pay Expected to Drop

(November 28, 2011) — Wall Street annual pay could fall by up to 30% from a year earlier to the lowest level since the 2008 financial crisis.

The Wall Street Journal, citing a compensation study conducted by the Options Group, reported that bonuses are also expected to decline between 35% and 40%. 

According to the executive search and consulting firm, annual compensation for employees at large Wall Street firms is likely to be the hardest hit in areas such as fixed-income, currencies, and commodities.

The report by the Optics Group follows a May 2010 study by compensation consulting boutique Johnson Associates, which found that money management compensation should increase by up to 20% during the year. The pace of economic recovery, industry activity, business mix, and evolving legislation are key bonus drivers for 2010, the report said.

Meanwhile, in September, a report by the Council of Institutional Investors (CII) showed that about 92% of shareholders expressed discontent over executive pay relating to performance at the companies they invest in. CII’s research found that 37 companies fell short of majority support out of 2,340 say-on-pay votes at US companies in the first half of the year.

The report — titled “Say on Pay: Identifying Investor Concerns” and prepared by Robin Ferracone, executive chair, and Dayna Harris, vice president, both of Farient Advisors — focused on 2011, the first year say-on-pay voting was required at US companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act. In January, the Securities and Exchange Commission (SEC) adopted rules that would give shareholders at public companies a nonbinding vote on executive compensation packages, reflecting an effort to give shareholders greater authority over executive pay following the financial crisis, when many investors expressed public outcry over extravagant pay practices. Investor advocates, pension funds, and shareholder groups have pushed for such a change.

The report urged that companies “should respond to investor concerns. The more aligned pay and performance the better,” the report said. This alignment “is a combination of pay sensitivity to changes in performance, the overall size of compensation and the proportion of performance-based pay.” 

CII members including the California Public Employees’ Retirement System (CalPERS), California State Teachers’ Retirement System (CalSTRS) and New York State Common Retirement Fund cited a range of important factors to explain their reasons to vote against executive compensation, which included poor pay practices (37%), poor disclosure (35%) and inappropriately high level of compensation for the company’s size, industry and performance (16%). Furthermore, the report said that more than a quarter (27%) of the companies with failed say-on-pay proposals were in real estate, homebuilding or construction-related businesses, all hit hard in the economic downturn.