2007: The Year in Bonuses – Winners and Losers
Contributed by Susie Potier
Come December, the whispers on Wall Street are not about who is doing what for New Year’s Eve or where to go on the perfect winter beach getaway. Let’s not kid ourselves. The talk on the Street is all about bonuses. Who’s getting how much, and more importantly, who’s not getting as much as he or she expected.
While the process of handing out bonuses is generally shrouded in secrecy, that doesn’t stop people from speculating. Relevant facts under consideration include how much employees at the same level received last year, whether profits for the year were up or down, whether stock prices at publicly traded companies rose or fell, and how the company was impacted by the subprime mortgage crisis, among other things.
While bonuses at investment banks and hedge funds won’t be handed out until January or February, depending on when the company’s fiscal year ends and what their internal policies are, one group of Wall Streeters is already sitting pretty: lawyers. Unlike investment bankers, who generally receive bonuses tied to individual performance and market returns, most New York lawyers at major law firms receive “lockstep” bonuses, meaning that all members of the same entering class receive the same amount, set annually by the managing partners of the firm and distributed in the all-important bonus memo.
This year, there was a slight shake-up in the attorney bonus world, when Cravath, Swain & Moore announced “special bonuses” to be paid at year end, and other big law firms quickly followed suit. The bonus watch was aggressively chronicled through the leaking and posting of internal firm memos posted on the online legal gossip site abovethelaw.com, which most big law firm associates spend the month of November avidly reading. Second year associates at big law firms in New York (class of 2006), who last year got a raise to a base salary of $160,000, would now be receiving $35,000 as an annual bonus, in addition to a $10,000 “special bonus,” according to Cravath. Bonuses for ascending classes were to be paid out as follows:
Class of 2005 — Year end $40,000, special $15,000
Class of 2004 — Year end $45,000, special $20,000
Class of 2003 — Year end $50,000, special $30,000
Class of 2002 — Year end $55,000, special $40,000
Class of 2001 — Year end $60,000, special $50,000
Class of 2000 — Year end $60,000, special $50,000
Most other competitive major law firms could not jump on the bandwagon fast enough, and news about firms such as Debevoise & Plimpton, Simpson Thatcher, Paul Weiss and Davis Polk jumping in to match the bonus structure appeared on abovethelaw.com‘s bonus watch thread within days or even hours. More and more firms announced their matching bonus structure, but soon rumors began to swirl that some firms were only matching for associates in New York while others were rolling out the raises nation-wide. Additionally, bloggers soon reported that not all of the firms claiming to match the bonus structure had truly matched the market, as some firms made the special bonus “discretionary,” and defined discretionary in a similar manner to Bill Clinton’s famous efforts to define the word “is.” That is to say, according to some arcane set of principles known only to them and not understood by the general public.
Even so, in a year concluding with a marked economic downturn, lawyers receiving lockstep bonuses come out clear winners in the bonus game.
Other probable big winners are everyone’s favorite investment bank, Goldman Sachs. In case you have not read the 500,000 articles cited to in yesterday’s New York Magazine Intelligencer bulletin, we will recap. Goldman shorted the subprime market and came out the victor, announcing eye-popping 2% profits and once again outpacing expectations and the competition. Goldman’s 26,000 employees are expected to haul in an average of $600,000 each during bonus season, as the top dogs dole out year-end packages of delight from a record bonus pool of $20.1 billion. Of course, these numbers are heavily skewed towards the top of the food chain, as the high-level executives will take the lion’s share of these bonuses.
Probable big losers in the bonus game? Analysts and associates working at other investment banks, particularly those who have reorganized at the highest levels and/or seen huge losses in the wake of the subprime disaster, including Citigroup, Merrill Lynch and Morgan Stanley. According to bankersball.com, an investment banking gossip website, Credit Suisse and Deutsche Bank expect lean bonus years, while Lazard, like Goldman, is in good shape. For a full roundup of the recent investment banking job cuts and likely implications on bonuses, check out “Who’s Who in Getting Fired,” at Banker’s Ball.
Finally, we at the Glass Hammer are hoping that someone will pull back the curtain and show us the wizard behind the opaque structure of hedge fund and private equity compensation. A culture of secrecy and competitiveness pervades hedge funds and private equity shops, and makes the guessing game of compensation and bonuses, tied to individual performance and fund returns, all the more of a grab-bag. Says one analyst, “At my fund, everyone just gets an envelope on bonus day with a slip inside that says their bonus for this year and their compensation for next year. No explanation and no discussion. Everyone just hides their envelopes away and doesn’t even consider sharing the information with co-workers.” So, the verdict is still out on how alternative investment fund year-end compensation will shake out compared to last year.
Have a tip or prediction? Want to gripe? Add your comments here on The Glass Hammer finance bonus thread.
