Wall Street's real business is all about making money. Not for you, silly -- for itself.
The Street's unbalanced incentive scheme becomes most evident this time of year. As investors anticipate fourth-quarter results, so do the men and women of Wall Street. In the coming weeks, there will be a lot of back-slapping in the halls of Merrill Lynch (NYSE: MER ) , Morgan Stanley (NYSE: MWD ) , Goldman Sachs (NYSE: GS ) , and Bear Stearns (NYSE: BSC ) .
Not because of the industry's good fortune, of course. (This was a record year for profits, by the way.) No, the high-fives among the Wall Street Wise stem from two simple words: Bonus time!
Beginning in mid-December, 150,000 of these hard-working Wall Street laborers will learn the amount of their year-end bonus. According to Johnson Associates Inc., a compensation consulting firm, the average year-end incentive payout (including cash bonuses and equity awards) for a Wall Street pro will be 5% to 10% higher than last year. Some hot shots -- such as investment bankers and prime brokers -- may see a check padded by as much as 20% more than 2004's bonus, and specialists in energy markets, hedge funds, and proprietary trading will likely earn even more.
"Honey, pack up the Hummer . we're goin' to Belize!"
New York magazine recently offered a peek into the payouts and politics of Wall Street's bonus biz, with an inside look at how Goldman Sachs will dole out the $11 billion it's set aside for incentives.
Yes, you read that right: $11 billion (which includes base salaries as well as the bonus kitty). Rewards rule Wall Street. The article quotes one industry veteran as saying "Wall Street is just a compensation scheme. They literally exist to pay out half their revenue as compensation."
How do the paychecks and bonuses get dealt? Goldman Sachs has 22,000 employees worldwide. As New York pointed out, the $11 billion split equally among them would amount to $500,000 a piece.
Don't brush up your resume quite yet. According to the article, Goldman's top dogs -- 250 partner managing directors -- get an average bonus of $2 million to start. Top producers can expect incentive rewards up to $40 million. The next tier of management -- executive managing directors -- can ring in 2006 with a bonus of up to $3 million. Recent college grads earning around $70,000 could expect that same amount at bonus time in a one-time lump sum payment, while their MBA counterparts could match their $95,000 salaries in bonus pay. Support staff -- such as secretaries earning as much as $75,000 -- might get a check cut for $15,000.
The ghost of bonuses past
As flush as those payouts sound, they still aren't on par with bonus day in 2000. Or even 1999 or 2003, the second- and third-most-profitable years for the Street, according to the Securities Industry Association. Wall Street's 2005 bonus pool is expected to be in the $16 to $19 billion range.
Cue wavy computer screen and travel-back-in-time music: We're in the year 2000, when big banks' spirits were as high as the peaking stock market -- and payouts reflected the boss's gratitude. This year, a top director at an investment bank receives an average award of $1.5 million.
The music goes into a minor key and we're whisked into the year 2004: The same top boss -- a little grayer and following the South Beach Diet regimen -- rips open his bonus envelope and finds a check for -- dumdum duuuuumm -- just $1.05 million. Hey, at least it's not 2001, when Wall Street workers tightened their alligator belts and took a 30% hit in bonuses. That year, the average paycheck was padded by $60,000, according to the Securities Industry Association.
Is that a tear in your eye? Or did you dislodge a contact lens while rolling your eyes?
Here's a tissue. This year's average bonus for a managing director at an investment bank will be $1.2 million, according to Johnson Associates.
Ladies and gentlemen, it looks like Wall Street's back in business. Bonus business, that is.
Related Wall Street Foolishness:
Dayana Yochim will be heading to Wall Street on Bonus Day with tissues and a tin cup. She owns none of the companies mentioned in this article.