Wall Street's surviving titans, eager to impress regulators writing the rules that will govern the financial industry, are scaling back their lavish and much-maligned pay practices, at least for now.
-- Regulatory concerns prompting cautious approach on pay
-- Goldman, Morgan Stanley slash comp ratios
-- Bank execs say ratios could change in either direction
Goldman Sachs Group Inc and Morgan Stanley have long paid out about half their revenue as compensation, a sum unequalled in any other major economic sector, but standard in a business famous for paying multimillion-dollar bonuses to its rainmaker bankers and traders.
In the first half of 2010, though, they cut that ratio to about 40 percent.
"They probably, at least in the near term, as best they can, do not want to incur any more ire from Congress and the regulators," said Mendon Capital Advisors President Anton Schutz.
Other factors may have contributed to the cutback, including banks that flamed out like Lehman Brothers and Bear Stearns, along with a slow hiring recovery on Wall Street.
Goldman, which reported an unusually slender quarterly profit and dwindling net revenues on Tuesday, trimmed its compensation ratio to 43 percent, setting aside $9.2 billion for pay in the first half. That is down 7 percent from the first half of 2009. Goldman said it was the lowest ratio for the first half of the year since the firm went public. That means the average Goldman employee would make $272,580 for the first half of the year, a sum that shows restraint compared with the past. Midway through 2009, the amount was $364,134.
Morgan Stanley, which saw its trading revenue soar in the second quarter after it revamped its trading desks, trimmed its ratio to 39 percent in its institutional securities group, setting aside $3.8 billion. Morgan Stanley's investment banking pay ratio was 69 percent in the first half of 2009, inflated by unusually low revenue and a hiring spree to restock its ranks of bankers and traders.
Changes in regulation and a more aggressive approach by regulators is probably weighing on pay decisions, especially after Morgan Stanley and Goldman became bank holding companies during the financial crisis.
"Perhaps someone tapped them on the shoulder and said, 'you are bank holding companies now'," said Cornelius Hurley, a professor and director of Boston University's Morin Centre for Banking and Financial Law. "These aren't the good old days anymore." With the first half on the books, analysts want to determine whether 40 percent is the new norm for compensation ratios. The banks' executives told analysts this week that it is difficult to say.
"It's our best estimate of what we would pay, but it's based on our performance, on the competitive environment and on the external environment," said David Viniar, Goldman's chief financial officer, said on Tuesday. "And any and all of those could change in either direction."
Morgan Stanley Chief Financial Officer Ruth Porat told analysts her firm's ratio would depend largely on financial performance, the competition and government oversight.
In 2009, Goldman stashed away $16.7 billion for compensation over the first three quarters. But in the fourth quarter, as public pressure mounted to rein in pay, Goldman reported a negative compensation ratio by giving $500 million to charity and cutting off pay.
The firm was the target of a backlash over pay after it set aside billions of dollars for bonuses soon after US taxpayers committed hundreds of billions to bail out the banks. It's anybody's guess whether the new frugality will last. Salaries could rise again as the economy picks up and memories of the 2008 financial meltdown fade.
Cutting the compensation ratio is encouraging news, though, for those looking to Wall Street to rein in its pay and reward shareholders for their investments.