Bonus Bust

It seems like just a year ago that Wall Street executives were patting themselves on the back for another stellar year. The total 2006 bonuses for the C-Suite could feed many third world nations and yet a scant year later, the landscape has shifted. Yesterday, the bosses of two major firms announced that bonuses would total the big goose egg.

Bear Stearns, the firm that will likely be remembered as the “tip of the 2007 subprime iceberg” said that its Chief Executive Officer James Cayne and other senior executives would forgo bonuses for this year. This is probably a pretty good idea, especially when the firm is expected to announce its first quarterly loss ever. Across town, the folks at Morgan Stanley announced some news of its own, some bad, and some less-bad.

Morgan Stanley's first-ever quarterly loss was highlighted by a $9.4 billion write-down related to mortgages. But it also said that it was shoring up its capital with a $5 billion investment from China's sovereign wealth fund. Like Jimmy Cayne, Morgan Stanley CEO John Mack will take a pass on a year-end bonus this year. But don’t feel too bad for him—he’ll probably figure out a way to stretch last year’s $40 million bonus to help his personal cash flow withstand the sagging the value of his stock, down over 25% year-to-date heading into the day yesterday.

CEO bonuses notwithstanding, total compensation at Morgan Stanley, including salaries, benefits and bonuses, climbed 18% to $16.55 billion in 2007 from $13.99 billion last year. Year-end bonuses, estimated at about 60% of the total comp, will jump to $9.93 billion from $8.39 billion. In a weird way, it makes sense. After all, the guys in the profitable units---equities, investment banking and wealth management---saved the firm from even worse performance.

When all is said and done, folks in this industry get paid a whole lot of money in both the good years and the bad ones. Yes, it’s obscene, because they are not saving lives, teaching the youth of America or finding a cure for cancer. But still, I for one appreciate when the guys at the top acknowledge that they bear responsibility for the decisions that led to the bad year and accordingly, should not be sucking money out of the company. Now if they can get those risk management departments in line, we may see the other side of this nastiness.