Why Wall Street Bonuses Are Changing This Year

Why Wall Street Bonuses Are Changing This Year

It's that time of year again when Wall Street professionals and employees across corporate America anxiously await word on their year-end bonus. For many, Santa will be stuffing their stockings with more green in 2013, but for others their stockings will feel a little bit lighter this year. For others still, they may be surprised to learn that cash isn't part of the bonus equation at all.

Estimated Change vs 2012

Financial advisors, asset managers, underwriting investment bankers

up 10% to 15%

Wall Street employees overall

up 5% to 10%

Bond traders

down by as much as 15%

Advisory investment bankers

down 5% to 10%

Alternative firms (hedge funds, private equity, prime brokers)

up 5% to 15%

*Source: Johnson Associates

On Wall Street, whether year-end bonuses are paid in cash depends largely on the employee's level. For instance, senior executives are likely to see a combination of cash and equity, while very senior execs will get mostly equity, such as company stock and options. The lower part of the organization is paid mostly in cash.

And while Wall Street bonuses are on the rise for the second straight year, they still pale in comparison to the more lucrative pre-recession times of 2007. Alan Johnson, managing director of Johnson Associates, a compensation consulting firm, isn't at all surprised by the way that 2013 bonuses are shaping up.

"On Wall Street, the bonuses are reflecting the performances of firms," Johnson told me. "The performances have not come back, so bonuses clearly shouldn't come back. They are in reasonable alignment."

Johnson also spoke of a trend on Wall Street that involves payout of bonuses not only in equity, and cash, but also with debt, including high-yield bonds and mortgage-backed securities. It is a trend that has already gripped the likes of UBS and Credit Suisse and may become more pervasive among Wall Street firms.

"It's generally a good idea and well received," Johnson said. "Over time, we will see more of that." He explained that bonds as part of the bonus structure touches on several key themes. For one, it's in alignment with discouraging excessive risk taking; it also provides some diversification for participants and it conserves the equity. "I think debt to some degree will be utilized more. It's a good idea," said Johnson.

Shop till' you drop
In corporate America, profits more broadly have been on the rise in 2013, climbing to a record 70% of GDP in 2013, according to Forbes. Select employers, however, instead of paying out some of that cash are handing out shopping sprees as a means to reward employees.

In doing so, companies are saving on expenses and potentially rallying morale among the ranks. Companies that use the shopping bonuses as a replacement for higher wages and year-end bonuses are finding the decision to be cost-effective, according to a report in The Wall Street Journal. Millennials are even preferring prize bonuses over cash-based incentives ... as long as they are being compensated well to begin with, the report suggests.

Year-end bonuses like this offer the excitement of a reality show when one or a select group of employees are chosen to basically shop until they drop, grabbing as much merchandise as they can handle in a few minutes at places like Costco Wholesale, Winn Dixie, and shopping malls, according to the report. The mall visits tend to have a price limit, while the individual store adventures either have a time or price ceiling.

It's been a bit of trial and error, as last year one lucky employee filled his coffers with approximately $25,000 worth of merchandise, promoting employers to set more stringent limits surrounding time and merchandise quantity on the bonus event.

Wall Street CEOs are among those whose stocking stuffers will be a little lighter then they might have hoped. For instance, Goldman Sachs' chief Lloyd Blankfein's 2013 bonus is expected to be flat with 2012's payment. But he won't be getting a lump of coal, either. Last year, his total compensation nearly doubled to $21 million versus 2011 levels, according to The New York Times Dealbook.

As for the shopping bonus, while it sounds "fun," Johnson says something less frenetic might be in order so that in the mad dash "nobody gets hurt."

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Originally published