BUSINESSWEEK ONLINE : NOVEMBER 20, 2000 ISSUE
FINANCE The Street's Punishing Pay Stubs Stock market investors may not be making much money this year, but investment bankers certainly are. Wall Street is expected to create twice as many millionaires this year as it did in 1999. Four thousand managing directors, directors, and vice-presidents of investment banks will earn at least that much in 2000, according to compensation consultant Johnson Associates Inc. And 100 bankers, 30% more than last year, will rake in over $10 million, putting them in the superstar league with the likes of Salomon Smith Barney telecom analyst Jack Grubman, who earns in excess of $20 million a year. Such pay packages assume the good times will keep on rolling. In fact, Wall Street firms have a history of agreeing to ultrahigh salaries and hiring too many employees--only to get into trouble when the market goes down. Are the banks doing it again? Trading volume and securities underwritings have already turned sluggish. In recent weeks, Salomon and Goldman, Sachs & Co. have reduced their earnings estimates for such investment banks as Lehman Brothers and Morgan Stanley Dean Witter. Says Judah Kraushaar, securities industry analyst at Merrill Lynch & Co.: ''If we get to the point where revenues begin to go sideways or--God forbid--contract, the industry is going to have a very challenging time.'' Already, the trend toward more multimillion-dollar packages is driving the costs of doing business up sharply for many firms. The ratio of compensation to revenues is up to 55% at Salomon and 52% at Lehman, vs. 42% at Morgan Stanley. And consulting firms say investment banks will have to make even bigger outlays to survive, as the financial-services industry consolidates. Boston consultants Cerulli Associates Inc. estimates that brokerages will have to spend $14.9 billion between 2001 and 2005, vs. $6.7 billion in the previous five years, just to recruit and train new brokers. How have investment banks painted themselves into this corner? Just a year ago, they sweetened their compensation packages to keep their best and brightest from rushing off to join dot-com and venture-capital firms. This year, the pressure is coming from commercial banks and smaller investment banks trying to poach talent when two rivals merge. ''All of the consolidation has worked incredibly in our favor,'' says Bradley Jack, head of global investment banking at Lehman, which has hired about 1,000 bankers and analysts this year, many of them from merged competitors. ''It's harder for individuals to see that they're having an impact in a large organization.'' Such predatory attitudes, in turn, are forcing merged banks to pay even more to keep their stars. PLAYING HARD TO GET. And, bizarre as it seems, Wall Street's dimmed prospects are making it all the more important to attract, and keep, top talent. ''Everyone wants to get their people in the chairs before the music stops,'' says Alan Johnson, managing director at Johnson Associates. ''So there's a frenzy.'' Sought-after stars are becoming picky. ''In the past, people just signed up with a firm if the pay was right,'' says Robert L. Thornton, who took eight weeks and met with 10 Deutsche Bank executives before he decided to leave Lehman to head Deutsche's West Coast tech mergers and acquisitions team. ''People spend more time considering who will be a longtime survivor.'' Deutsche Bank is Wall Street's worst offender. It desperately wants to be a major player in North American investment banking. To boost its investment-banking muscle, it bought Bankers Trust Alex. Brown Inc. in 1998--a deal that failed to give it the heft it wanted. So the big German bank is now filling out its ranks by raiding other major investment banks. In the past 12 months alone, the bank has poached heavy hitters from Salomon, Lehman, J.P. Morgan, and Donaldson, Lufkin & Jenrette. And it has spared no expense. The firm is keeping mum on specifics. But industry compensation experts say the bank is offering multiyear guarantees of multimillion-dollar packages to investment bankers and equity analysts. Since it has stolen so many of its rivals' stars, ''I don't think we're the most popular firm on the Street right now,'' admits Alex Mason, co-head of corporate finance at Deutsche Bank. He denies that Deutsche has been overpaying people. ''Average compensation packages have gone up--like major league baseball contracts,'' he adds. For small outfits that want to morph into major players, it's cheaper to chase talent than pay astronomical premiums for whole firms and then see the talent walk. Bank of America, for example, lost many of Montgomery Securities' top executives when it bought the firm in 1998. And Deutsche Bank was hit with an exodus of top bankers after its Bankers Trust deal. But the build-don't-buy strategy is still costly. ''It's a never-ending round of poker, where you up the ante every time,'' says Ed Jones, financial-services partner at KPMG. Sweet deals are trickling down. Many banks now give stock options to lower-level employees and let them invest in the bank's private funds. ''Typically, co-investing in a merchant-banking fund was reserved for the firm's managing directors,'' says John Rogan, a managing director of Russell Reynolds Associates' global banking practice. Not all investment banks have joined the compensation craze. Robert Gottleib, head of human resources at Goldman Sachs, regards the latest rich packages as irresponsible. ''We are not out there bidding people away by promising them multiples of what they have earned. We just don't do that,'' he says. LESS HEFTY HIKES. And not everyone is being offered handsome premiums. Financial mergers are expected to throw at least 5,000 Wall Streeters out of work this year. With fewer places hiring, pay hikes for job-hoppers are already slowing down. Eric Archer, president of the executive search practice at consultant Spherion Corp., estimates that bankers who several years ago could double or triple their salaries jumping to a new firm can expect increases of only 25% to 50% now. One exception: Tech bankers say they can still double their salaries by moving to a rival. The pace is slowing, but a 25% leap on top of an already high base is still a lot of dough. Many research analysts are now taking home annual salaries in the seven figures. ''The rate of growth in salaries will be slower this year,'' says Richard G. Lipstein, managing director of executive search firm Gilbert Tweed Associates Inc. ''But the numbers are still staggering.'' That could hurt the Street badly. ''In most of 2000, the tide was moving with investment banks,'' says Johnson. ''Now it looks like it's moving against them. If that trend continues, 2001 is going to be a significantly worse year--and they will get absolutely no sympathy from anyone.'' For now, though, thousands of Wall Streeters are laughing all the way to the bank. Until February, when huge bonus payouts are traditionally made, at least most will stand pat and collect the cash--unless, that is, they get a better offer in the meantime. By Emily Thornton and Heather Timmons in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS The Street's Punishing Pay Stubs TABLE: Wall Streeters Get Richer INTERACT E-Mail to Business Week Online

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