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Ivy Schmerken
Ivy Schmerken
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Bonus Blues: Meet the Zeros

To boost profits and curb the risk-taking, some Wall Street firms are giving nothing but zeros to mid level traders and back-office staff.

As Wall Street bonus season gets into full swing, there’s a new club that no one wants to join, known as the Zeros.

According to Monday’s New York Times, employees inducted into the infamous club include a broad swath of back-office staff, mid-level traders, bankers and brokers who will receive nothing but zeros this year.

Employees ought not to be shocked. In response to the credit crisis of 2008, Wall Street firms substantially increased the base pay of their employees to appease regulators, who argued that excessive bonuses based on performance encouraged excessive risk taking. At Goldman Sachs, the base pay of managing directors rose to $500,000, from $300,000 while at Morgan Stanley and Credit Suisse, salaries jumped from $400,000, from $200,000, according to the article.

Even though employees will receive about the same amount of money that been rolled into their salaries, the “psychological blow” of not earning a bonus is unbearable to those whose egos and self-worth are wrapped up in the Wall Street ethos of prestige and success. This may in turn have an impact on the local economy because bonus money tends to be spent differently on impulsive luxury items such as jewelry from Tiffany’s or a new mansion in Greenwich.

Compensation heads are not having a fun time dealing with grumpy employees who will receive nothing but zeroes in their bonus checks this year, and are willing to throw a few crumbs their way to quiet them. One senior banker is anonymously quoted as saying, “It’s a real headache.” In some cases, the firm will “throw $20,000 or $25,000 at each of the zeros so they’re not discouraged.”

Though Wall Street five largest firms have set aside nearly $90 billion for bonuses this year, compensation experts told the NYTimes that bonuses payments will vary widely this year. The leveraged finance group at JPMorgan and Bank of America is looking at a 10 to 20 percent bump over last year due to record issuance of junk bonds, while equity traders are looking at a 10 to 20 percent drop because trading volume tailed off in the second half of the year. Morgan Stanley is reportedly under the most pressure to scale back on bonuses, according to the NYT article. The firm has hired 2,000 people in 2010 to rebuild business after the financial crisis but has lacked growth in new revenues, according to the NYTimes story. The firm paid out a record 62 percent of its net revenues in compensation and benefits in 2009, and CEO James Gorman has vowed to bring that number down to boost profits and gain credibility with shareholders. “Compensation will be lowered across the board, but there will be plenty of Zeros,” states the article, citing a person familiar with Morgan Stanley’s compensation process.

However, some of the top traders and directors at the best performing desks will still receive lucrative payouts. As with trends in the rest of corporate America, CEOs at Wall Street firms will escape the dismal destiny of the Zeros and instead see their payouts reach the stratosphere as the memories of the financial crisis fade.

The question is will the street’s latest attempts to the curb the culture’s obsession with bonuses succeed or will it backfire? Employees who are getting nothing but zeros could jump to a hedge fund or proprietary trading firm that is keen to poach their skill sets in the front or back-office. Not everyone can do that, though. It seems that the Zeros should learn to be thankful for soaring pay raises, especially since many industries have had pay freezes in effect as well as permanent job losses. After all, the Zeros club could be a short-term strategy to gain the respect of regulators and shareholders. On the other hand, this could be the new normal as firms try to prove that Wall Street isn’t a casino.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio
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