The days when Wall Street banks could blithely hand out half their revenue in compensation to their staff without a murmur from shareholders have come to an end.
In an era of leaner times and tighter regulation, big mutual funds and pensions are growing more vocal in pushing executives at investment banks to rein in pay and bonuses and consider more staff cuts. Investors worry that bank employees are getting too big a piece of a shrinking pie, leaving shareholders a much smaller slice.
So far, much of the jousting is taking place behind closed doors. But the debate over whether investment banks should keep devoting roughly 50 per cent of revenue to employee compensation is starting to enter the public realm through proxy battles and as more large shareholders speak out on the issue.
“Sometimes executives are being rewarded immensely for just sitting in their chairs, just coming into work every day,” said Aeisha Mastagni, an investment officer at California State Teachers’ Retirement System, which manages $154 billion in assets. “There is a need to conform to truly performance-based compensation.”
Wall Street pay was not a big concern to investors when investment banks were highly profitable and shareholders were reaping benefits too, Mastagni and other investors said. But large shareholders are becoming more vocal because earnings no longer justify compensation at pre-financial crisis levels. Last year, Morgan Stanley executives came under fire during some investor meetings, according to one person who attended those meetings but was not allowed to discuss them.
At one meeting, he said, “furious” representatives from mutual funds who were among the bank’s 10 biggest investors sharply questioned executives, including the chief financial officer and head of investor relations, asking why Morgan Stanley could not cut compensation to about 30 per cent of revenues. Wesley McDade, a spokesperson for Morgan Stanley, which has paid out 51 per cent of revenue for compensation the past two years, did not initially offer a comment on the matter.
But later on Thursday, Morgan Stanley Chief Executive James Gorman told the Financial Times that the bank was planning to consider lowering pay and bonuses in its next round of cost-cutting. “There’s way too much capacity and compensation is way too high,” Gorman was quoted as saying.
Gorman told the paper that traditionally Wall Street kept compensation ratios flat when revenues went up but increased the ratio when times were bad, arguing they needed to retain people. “That’s a classic Wall Street case of ‘Heads I win; tails, you lose’. The current Wall Street management is a little tougher-minded about that and shareholders are certainly tougher-minded,” he said. When asked about Gorman’s comments, McDade, the bank spokesman, said he did not dispute the Financial Times story.
Jeff Harte, an equity research analyst at boutique investment bank Sandler O’Neill, who often organises meetings between investment bank executives and investors, said compensation has been “a theme in management meetings.”
“Investors are saying, 'We're past the crisis; you guys still have low returns'," Harte added. "At what point do you admit that this is the new normal?"
Mastagni said some large Wall Street banks, such as Goldman Sachs Group Inc and JPMorgan Chase & Co, have begun reaching out to shareholders to explain their rationale for compensation decisions. She said the outreach is welcome but CalSTRS is looking for banks to act more decisively on pay.
“I’m not sure that we could agree with the fact that 50 per cent of the revenue should be going to the employee base,” said Mastagni. “That’s just very difficult for us to come to grips with.”
With tougher talk from big shareholders, the balance of power may be shifting from bank employees who use capital to the asset managers who supply it. The longer banks suffer from weak earnings, the harder it will be to ignore shareholders on pay.
