It’s Bonus Season, and Even the Bosses Are Learning to Live Less Large

When Bear Stearns chairman and chief executive Jimmy Cayne sent

an internal e-mail on Oct. 18 to firm employees announcing 800 job cuts, the

news was hardly a shock to Bear Stearns bankers. Merrill Lynch, Credit Suisse

First Boston, Morgan Stanley and all the major banks were very publicly

slashing away at staff. With the recession cutting deeper every day, tiny

little Bear Stearns surely couldn’t remain immune.

What did come as a surprise in the e-mail was Mr. Cayne’s

announcement that he’d be taking a 70 percent cut on his bonus this year. “This

has been a challenging year for all of us and has required sacrifice at every

level of our company,” he wrote. “Accordingly the Executive Committee has

voluntarily elected to forfeit 50 percent of the bonuses we would otherwise be

entitled to receive this year. Based on current earnings levels, this election

is equivalent to an approximate 70 percent reduction year over year.”

Mr. Cayne has historically not been well known for his

self-abnegating qualities. Last year, among his peer group, only Citi-group’s

Sandy Weill ($225 million, including stock) paid himself more. But last year

was a different time: Excess and the big chunky bonus were part and parcel of

the Street ethos. It was something you deserved and that, with a wink, you

might even boast a bit about over a round of drinks and a hand of bridge.

Not anymore. By almost anyone’s account, it’s a bear market out

there. Brokerage-firm margins are shrinking, deals are evaporating and now, in

the wake of Sept. 11, Wall Street barons are trading in their silk shirts for

hair shirts and telling their minions to do the same. So instead of paying

himself $33 million, as he did last year, Mr. Cayne has declared himself more

than ready to take home a sum closer to $14 or $15 million-not starvation wages

by any means, but a strong indication nonetheless that the bonus season for

Wall Street bankers up and down the pay scale is going to be one of the leanest

in years.

Other C.E.O.’s are also calling on their ranks to sacrifice for

the greater good. Earlier this month, CSFB chief executive John Mack gathered

all his managing directors together and fairly begged them to accede to a 30

percent reduction in their guaranteed bonuses. Do it for the good of the firm,

he reportedly said.

While Mr. Mack did not volunteer a pay cut for himself, his

message was loud and clear: Revenues and fees have plunged; so should bonuses.

It is news that will certainly jolt a generation of Wall Street

executives-junior as well as senior-who have grown accustomed to the perpetual

bloom of their bonus packages.

“Bonuses on Wall Street have usually been very sticky, even in

bad times,” says executive pay consultant Graef Crystal. “But now, because of

all the layoffs, plus Sept. 11, the optics will not look good for these guys,

so they will have to moderate their pay.”

No surprise there. Earnings for Wall Street firms are expected to

be down between 40 and 50 percent this year compared to last. Initial public

offerings and mergers-once a money-making staple of the go-go years-have

disappeared. And while layoffs will continue as firms struggle to adjust to a

flaccid market environment, the quickest way for Wall Street to save cash will

be to cut back on the bonus pool.

Normally, the very prospect of a bonus pullback would draw howls

of protests from ego-inflamed bankers. Frequently making up as much as 80 to 90

percent of total pay packages, the bonus in the 1990’s has come to symbolize

all that it means to be a big swinger on Wall Street. Whether it was Morgan

Stanley Internet analyst Mary Meeker’s $15 million figure in 2000 or CSFB bond

wizard Jack DiMaio’s $15 million guaranteed deal for this year, the sums

themselves came to define and magnify those who earned them.

Going into bonus season, bankers would puff their chests, marshal

figures in their defense and cry bloody murder if their numbers came in less

than expected-or else they would quit and take their act to a rival firm. But

the post–Sept. 11 pall that shrouds Wall Street has wiped away the giddiness of

past bonus seasons.

“I think people have been chastened by recent events,” said Jamie

Peretz, a managing director at executive recruiter Korn-Ferry. “There won’t be

much whining and complaining this year.”

Most bankers won’t have any idea as to their bonuses until

mid-January, following their firm’s year-end. But Morgan Stanley and Goldman

Sachs, with their fiscal years concluding at the end of November, will start

letting people know about their numbers early next month. And at both firms,

bankers are now prepping themselves for the worst-a slashing of their bonuses

by as much as 50 percent, say headhunters and Morgan Stanley and Goldman


“Expectations are low,” said one Morgan Stanley executive who

preferred to remain anonymous. “But people will not be surprised. We are all

happy that we have jobs in this environment.”

Said another Morgan Stanley banker: “I’m from New York and was

brought up here. Right now, I’m more concerned with the international and the

municipal situation than being flat-to-down next year. I’m just grateful to be


At Goldman Sachs, the sentiment is the same, though with a twist.

While Goldman Sachs senior management has warned its bankers to expect bonus

levels 50 percent down from last year, it has also indicated that as much as 40

percent of some pay packages may well come in the form of Goldman Sachs stock

options. A source within the firm adds that, while nothing is final yet, the

vesting periods (or the time when one can sell one’s stock) for these options

would be in one-, two- and three-year increments, and that the rationale for

this move would be to prevent further job cuts. A fine notion, to be sure, but

still a tough dose of medicine for bankers used to the big cash payouts of

years past.

But that’s not the worst of it, say some Goldman bankers. When

Goldman Sachs’ fiscal year ends on Dec. 1, the strike price (or price at which

one can sell) for the stock-option bonus component will either be the share

price on Nov. 30, or an average for the previous month. Whatever the case may

be, Goldman Sach’s share price-currently at $88-has been on the rise since

hitting a low of $64 after the Trade Center attack, causing some Goldman

bankers, ironically enough, to wish for it to fall. Since they’re already taking

a 50 percent hit on their bonuses, the last thing bankers want is for 40

percent of their pay to be locked up in options that may well end up being

worth nothing if the stock hits the skids again.

“In order for those options to have any real value, the stock

would have to go to $120 or $130 per share,” said one senior Goldman banker.

“We are all sitting around saying, ‘We haven’t done any deals in months, our

business is 50 percent off from last year,

and the stock is up for the year.’ I think it’s more likely the stock goes back

to 75, which means the options they would give me now [at or near the current

price] would be worthless. It’s deeply depressing.”

But in these times, there’s not much a Goldman banker can do.

More so than its peers, Goldman has been very quick to adjust pay levels to

weakness in the marketplace-which is why its overall compensation level, at 49

percent of revenues, is amongst the lowest on the Street. Last year, while all

his peers awarded themselves a raise for the year, Goldman Sachs chief

executive Hank Paulson-expecting tougher market times to come-gave himself a

pay cut as his bonus narrowed to $14 million from $16 million the year before.

Expect another cut in pay to follow this year.

Shed no tears for these folks, though. They’ll still make their

millions, but there’s no mistaking that the brash sense of entitlement

characterizing the bonus periods of previous years is no more. It’s a time to

work hard and be thankful for what small financial favors follow.

“I love what I do,” added the senior Goldman banker in talking

about his reduced circumstances. “So I’m going to take it. As the joke goes

around here, we’re working twice as hard as we did last year for 10 percent of

the money.” It’s Bonus Season, and Even the Bosses Are Learning to Live Less Large