(Correct's paragraph 30 to fix spelling of names: Nelson
Peltz's Trian Fund Management)
* Bank profits have declined much more than executive pay
* Mutual funds, pensions seek bigger slice of shrinking pie
* Analysts say times have changed, pay cuts, layoffs needed
Oct 4 (Reuters) - The days when Wall Street banks could
blithely hand out half their revenue in compensation to their
staff without a murmur from shareholders have come to an end.
In an era of leaner times and tighter regulation, big mutual
funds and pensions are growing more vocal in pushing executives
at investment banks to rein in pay and bonuses and consider more
staff cuts. Investors worry that bank employees are getting too
big a piece of a shrinking pie, leaving shareholders a much
So far, much of the jousting is taking place behind closed
doors. But the debate over whether investment banks should keep
devoting roughly 50 percent of revenue to employee compensation
is starting to enter the public realm through proxy battles and
as more large shareholders speak out on the issue.
"Sometimes executives are being rewarded immensely for just
sitting in their chairs, just coming into work every day," said
Aeisha Mastagni, an investment officer at California State
Teachers' Retirement System, which manages $154 billion in
assets. "There is a need to conform to truly performance-based
Wall Street pay was not a big concern to investors when
investment banks were highly profitable and shareholders were
reaping benefits too, Mastagni and other investors said. But
large shareholders are becoming more vocal because earnings no
longer justify compensation at pre-financial crisis levels.
Last year, Morgan Stanley executives came under fire during
some investor meetings, according to one person who attended
those meetings but was not allowed to discuss them.
At one meeting, he said, "furious" representatives from
mutual funds who were among the bank's 10 biggest investors
sharply questioned executives, including the chief financial
officer and head of investor relations, asking why Morgan
Stanley could not cut compensation to about 30 percent of
Wesley McDade, a spokesperson for Morgan Stanley, which has
paid out 51 percent of revenue for compensation the past two
years, did not initially offer a comment on the matter.
But later on Thursday, Morgan Stanley Chief Executive James
Gorman told the Financial Times that the bank was planning to
consider lowering pay and bonuses in its next round of
"There's way too much capacity and compensation is way too
high," Gorman was quoted as saying.
Gorman told the paper that traditionally Wall Street kept
compensation ratios flat when revenues went up but increased the
ratio when times were bad, arguing they needed to retain people.
"That's a classic Wall Street case of 'Heads I win; tails,
you lose'. The current Wall Street management is a little
tougher-minded about that and shareholders are certainly
tougher-minded," he told the paper.
When asked about Gorman's comments, McDade, the bank
spokesman, said he did not dispute the Financial Times story.
Jeff Harte, an equity research analyst at boutique
investment bank Sandler O'Neill, who often organizes meetings
between investment bank executives and investors, said
compensation has been "a theme in management meetings."
"Investors are saying, 'We're past the crisis; you guys
still have low returns'," Harte added. "At what point do you
admit that this is the new normal?"
Mastagni said some large Wall Street banks, such as Goldman
Sachs Group Inc and JPMorgan Chase & Co, have
begun reaching out to shareholders to explain their rationale
for compensation decisions. She said the outreach is welcome but
CalSTRS is looking for banks to act more decisively on pay.
"I'm not sure that we could agree with the fact that 50
percent of the revenue should be going to the employee base,"
said Mastagni. "That's just very difficult for us to come to
With tougher talk from big shareholders, the balance of
power may be shifting from bank employees who use capital to the
asset managers who supply it. The longer banks suffer from weak
earnings, the harder it will be to ignore shareholders on pay.
Bank executives have been delaying big changes to staff
levels or compensation for as long as possible, hoping economic
growth will pick up and trading volume will rise.
Wall Street banks say they are worried that if they slash
compensation, top talent may flee for hedge funds and private
equity firms. If they cut staff, it can be more expensive to add
workers again when markets improve. Also, layoffs can actually
boost near-term compensation costs because of severance.
But investors say the problems keeping profits down may be
more permanent than banks acknowledge. In addition to the weak
economy and low trading volumes, new regulations and higher
capital requirements have cut into returns in fixed income and
Trouble in trading is one of the biggest factors behind
depressed bank earnings. It was a big reason Goldman Sachs
earned just $4.4 billion last year, a 60 percent decline from
Those earnings represented a 6.6 percent return on common
equity - a measure of how effectively the bank wrings profit
from its balance sheet by comparing net income to common equity.
Investment banks have historically aimed for more than 15
"People are starting to get the idea that investment banks
right now aren't run for the investors - they're run for the
bankers," said Ralph Cole, a portfolio manager at Ferguson
Wellman Capital Management, which manages $3.2 billion.
PRESSURE IS ON
Compensation is the biggest expense for most investment
banks, so cutting pay is a logical way to boost returns.
But for Goldman to have earned a 15 percent return on equity
last year, it would have had to pay just 15 percent of its
revenue to employees - far less than the 42 percent it did pay.
Wall Street executives contend that cutting pay to even 30
percent of revenue would cause a massive flight of talent and
evaporate profits, hurting shareholders even more.
But many investors have little patience with these
arguments. If employees cannot generate high enough returns for
their banks, their pay should be cut, multiple hedge fund,
mutual fund and pension fund investors told Reuters.
Some shareholders have taken dramatic steps.
Nelson Pelt z's Tr ia n Fund Management LP acquired a 5 percent
stake in investment bank Lazard Ltd this year, then
pushed management to slash compensation, a demand the bank is
heeding. Lazard has one of Wall Street's highest
compensation-to-revenues ratios, typically paying employees more
than 60 percent of revenue.
Jefferies Inc shares have dropped nearly 12 percent
since executives were grilled about compensation on an earnings
call last month. Since 2009, the investment bank has spent a lot
of money luring bankers and traders from larger rivals with big
pay packages that are guaranteed for years, making it difficult
for Jefferies to cut expenses. It paid out almost 60 percent of
revenue to employees last quarter.
At Citigroup Inc, shareholders voted against CEO
Vikram Pandit's pay package at an annual meeting in April. But
the vote was nonbinding and his compensation did not change.
Citigroup has been the only big bank to face such a rebuke under
a new say-on-pay rule.
Some banks have conceded that times have changed. Deutsche
Bank AG last month said it was cutting bonuses, axing
jobs, and spending less of its revenue on pay.
"The payout ratio, it's got to go down," said the bank's
co-Chief Executive Anshu Jain about the level of bonuses.
"Employees must make their contribution."
(Reporting By Lauren Tara LaCapra and Dan Wilchins; Editing by
Martin Howell and David Gregorio)