Wall Street Bonuses Draw Scrutiny in Bailout's Wake

That's not sitting well with taxpayers or some government officials, who wonder why firms that accepted federal bailout money would be paying bonuses at all. The questions only got more pointed this week as Merrill Lynch, which got a $10 billion capital infusion from the government last year, came under investigation for possibly paying secret bonuses just days before its Jan. 1 merger with Bank of America.

President Obama yesterday echoed concerns over the use of rescue money, telling reporters that there has been a "lack of accountability and transparency in how we are managing some of these programs to stabilize the financial system."

Wall Street is not the only industry whose compensation system has come under attack. The bailout of Fannie Mae and Freddie Mac prompted calls for reworked incentives at the mortgage-finance companies. And the auto industry's plea for federal funds briefly cast a spotlight on Detroit's union contracts. But the furor over Wall Street pay has been unmatched, fueled by mistrust of a business singularly focused on money and steeped in a tradition of handsome rewards.

"An auto worker making $60,000 a year is not going to drive people crazy, but some snot-nosed 32-year-old making three-quarters of a million dollars and whining about it, that's going to make people crazy," said Alan Johnson, managing director of Johnson Associates, a Wall Street pay consultancy.

Johnson estimates that 2008 bonuses on Wall Street dropped by as much as 70 percent for senior executives; 45 percent for investment bankers; and 30 percent for staffers in accounting, human resources, information systems and other support functions. But even after those cuts, firms such as Goldman Sachs and Morgan Stanley -- both recipients of bailout money -- said they spent nearly half their 2008 revenue on employee compensation for the year.

Advocates for the industry point out that many employees are accustomed to getting as much as two-thirds of their yearly pay in the form of a bonus, and that the cuts, coming at a time when many on Wall Street are suddenly shouldering much heavier workloads, could prove devastating.

But Johnson doesn't expect those workers -- even those who had no direct involvement in the investment and risk-taking decisions that have crippled the industry -- to find much sympathy from their fellow Americans. A recent Bloomberg-Los Angeles Times poll, for instance, found that three-quarters of respondents believed that financial firms that received taxpayer money should cancel their bonuses this year.

Part of the reason for the public anger, Johnson said, is that executives haven't done a good job of explaining that at many companies, bonuses have long been viewed as a form of deferred compensation rather than an unexpected tip for exceptional performance. They are also used to keep workers loyal and motivated.

Now, as financial firms struggle to defend the way they reward workers, many analysts suspect Wall Street's pay practices eventually will get realigned.

"The economics are going to be different, and once the dust settles and we can take the emotions out of it, we could be entering a new paradigm as to how all of this gets done," said Steven Hall, managing director of pay consultancy Steven Hall & Partners.

Skeptics aren't counting on the industry to reform voluntarily. And they're not yet satisfied with the government's limited attempts to rein in compensation at bailout beneficiaries.