For as long as there has been outrage over Wall Street megabonuses, executives have justified their handsome rewards by warning that if companies didn't pay up, talent would flee to rival firms. Now it appears that theory is being confirmed. Recruitment experts hired by Wall Street trading houses, which are expanding to handle booming stock and bond trades, say they are zeroing in on companies such as Citigroup (C), American International Group (AIG), and others that are under U.S. or European pay restrictions.
"The target list of nearly every major executive search firm these days includes executives from firms under TARP control," says Dennis Carey, a senior client partner at executive search firm Korn/Ferry International (KFY). He is referring to the Troubled Asset Relief Program, which pumped billions of U.S. taxpayer dollars into banks like Citi and Bank of America (BAC) during the financial crisis but also capped pay at the firms. "There's a significant opportunity to raid that talent," Carey says.
White House officials said on Oct. 21 that federal pay czar Kenneth Feinberg will slash total compensation for the top 25 highest earners at the seven firms that received massive injections by an average of 50% and lower salaries by 90% on average. Earlier in the month, Britain announced it had signed up Barclays (BCS), HSBC (HBC), Lloyds Banking Group (LYG), Standard Chartered (STAN.L), and the Royal Bank of Scotland (RBS) to follow limits on bonuses agreed upon by the Group of 20 nations at their September meeting in Pittsburgh. Those recommendations included deferring some bonuses and the possibility of later "clawbacks" of awards if the performance upon which they're based doesn't hold up.
New Rules from the Fed The pay gap could be tightened somewhat under rules the Federal Reserve proposed on Oct. 22. Banks in the U.S. would have to start persuading their regulators that pay practices don't threaten the bank's stability by encouraging excessive risk-taking; the Fed plans to compare pay policies across some 28 big and complex banks to rein in risk as well. But the rules may not go into effect for weeks or months as the Fed solicits and digests comments on the idea, and the proposal includes no firm pay limits or formulas.
Some financial institutions have emerged from the financial crisis intact and eager to seize market share from their troubled rivals. Firms such as Goldman Sachs (GS) and JPMorgan Chase (JPM) quickly paid back their TARP funds so they could operate free of the federal restrictions—and now find that position to be a valuable recruiting tool. "This is certainly one competitive advantage for some organizations, albeit one that is quite unique to this moment in time in the markets," says Timothy L. Holt, managing partner in the financial-services practice at executive recruiting firm Heidrick & Struggles (HSII).
Case in point: On Oct. 26, AIG Vice-Chairman Matthew Winter will become head of Allstate's (ALL) life insurance and retirement unit. Winter is one of at least 49 managers the beleaguered insurance giant has lost since September 2008, according to Bloomberg. AIG is struggling to turn itself around following a federal government infusion that has now reached $182.3 billion.
AIG declined to comment. Citi did not respond to requests for comment. Bank of America spokesperson Kelly Sapp stressed the company is "strategically hiring" around the world. "In fact, recently we have hired hundreds of high-performing and experienced financial advisers as well as a number of bankers, sales, and trading associates and analysts," Sapp says.
Compensation Concerns Linger After UBS (UBS) announced plans in February to eliminate cash bonuses for executive and managing directors at its investment bank, in addition to bonus cuts across the board, some 36 investment bankers migrated to Jefferies Group (JEF), a securities and investment bank in New York. By July, UBS had filed a lawsuit accusing Jefferies of raiding the firm. (The lawsuit has been settled, a company official says.)
The Swiss government divested itself of ownership in the firm in August, and UBS has gone on to acquire more than two dozen investment bankers, says Doug Morris, director of corporate communications. But concerns linger, judging by the companywide memo that CEO Oswald Gruebel sent out on Oct. 5 reassuring his staff that all employees "should be compensated adequately and in line with market norms for their role in the company and their performance."
Boutique firms are also attracting top talent away from big names. Since securities brokerage Hexagon Securities was formed in New York in January, it has hired away a trader from UBS, an analyst from Citigroup, a director from Barclays Capital, and a vice-president from BofA. "We saw the opportunity to have access to a pool of human capital that under normal circumstance wouldn't be as large," says Joe Messineo, a Hexagon managing partner.
Bluffing on Wall Street? Many don't buy the whole talent-must-be-paid justification for big bonuses. "I continue to wonder how much bluffing there is going on here," says Sarah Anderson, a fellow at the Institute for Policy Studies, a progressive think tank in Washington. "The financial sector's favorite argument has always been to warn they'll lose all their top talent, but given the state of the economy, the unemployment level, and the fact that European governments are cracking down, there's not so many places for Wall Street employees to go to get those massive paychecks."
There are certainly more people looking for jobs than there are slots to fill. Over the past year financial-services employers have shed 413,000 employees, on a seasonally adjusted basis, according to the Bureau of Labor Statistics.
Anderson argues that the public purse should be used to encourage all financial firms—not just those that have directly received government bailout funds—toward "more rational" pay levels. She says that can be done by imposing tighter limits on how much executive pay companies can deduct from corporate income taxes or by giving preference of government contracts to companies that don't pay their CEO more than 100 times the lowest-paid worker. "As long as you're dangling outrageously large amounts of money, it encourages outrageous behavior no matter how it's structured," Anderson says.
Bonuses Widening Pay Gap The pay gap is being exacerbated by a return to huge bonus payouts at some firms. On Oct. 14, The Wall Street Journal estimated that major U.S. banks and securities firms will compensate their employees up to $140 billion this year, up 20% from last year's $117 billion and even higher than the 2007 precrisis figure of $130 billion. Goldman Sachs alone could be on track to shell out some $22 billion in compensation by yearend, based on the third-quarter profits of $3.2 billion it reported on Oct. 15. That would come to almost $700,000 apiece if it were spread evenly among Goldman's 31,700 employees—which, of course, it won't be.
The prospect of those huge bonus payments, while much of the workforce struggles, has drawn harsh criticism from across the pond. "What happened with Goldman Sachs last week sends the wrong signals," said British Chancellor of the Exchequer Alistair Darling at an event in London on Oct. 21. "I've spoken to all our banks and none of them would be standing here today if the taxpayer hadn't put their hand into their pocket." If the U.S. doesn't broaden pay restrictions beyond the TARP companies, European banks could suffer from the resulting pay gap.
Much as U.S. politicians want to crack down, though, they also need big banks to return to health—which was the point of TARP in the first place. Taxpayers want to be paid back, with interest. But in order for that to happen, says Michael Walden, an economics professor at North Carolina State University, banks need to attract the best traders and other employees. "Handcuffing those firms from attracting that talent through pay will backfire," he says, and "will be a big deterrent for them to become financially healthy again."
Employee Loyalty Eroded Pay, of course, is just one factor in a person's decision to stay or leave. But massive layoffs have eroded confidence and loyalty, chipping away at cultures created over the years and with which employees grew to identify. "It used to take a lot more than money to get people to leave," says Gary Goldstein, president and CEO of executive search firm Whitney Group in New York. Once a worker feels his firm no longer is loyal to him, what's the sense in showing loyalty in return? "If people are leaving just for a couple more bucks, that belies a larger issue that firm is facing, in that they haven't been able to get people connected to the firm."
That breakdown of employee-employer ties, combined with uncertainty for the future brought on by the recent market calamity, makes an argument for jumping ship all the more compelling. Recruiters don't even need an explicit sales pitch, says Korn/Ferry's Carey. In a marked break from the past, the number of executives who have approached him hoping to explore other options, rather than the other way around, has picked up significantly since the TARP regulations were imposed. "I had a conversation with an executive just recently who called me and said, 'I need to get out of this place,' " Carey recalls.
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