Jan. 9, 2012 at 10:21 AM ET
Cue the world's smallest violin? Ahead of fourth-quarter earnings reports from major banks, compensation at 34 big financial firms in 2011 is projected to plummet. Some Goldman Sachs traders could lose up to 60 percent of their pay and will get no bonuses, and the average pay at Goldman Sachs will fall to $385,000 from an average $431,000 in 2010, according to the The Wall Street Journal Monday. By contrast, a report by Sentier Research last fall found that U.S. median household income in June of last year was $49,909, down from $55,309 at the end of 2007.
Banks' earnings were crimped for several reasons: The stock market fluctuated wildly, fewer IPOs were filed and companies had less demand for banks' high-priced consulting skills. The financial industry also tends to lay the blame at the feet of increased regulations for banks, such as limits on consumer banking fees. Still, the amount of money banks set aside for compensation has inched up over the past couple of years and now stands at 36 percent of revenue.
While bonuses have traditionally made up the bulk of banking's most eye-popping pay levels, some banks have changed their pay structures to focus more on salary than bonuses. Bonus-based compensation could motivate some employees to take on potentially damaging risks because it prompts them to focus on their own rewards rather than the health of the firm or the financial system overall, say some industry observers such as Nassim Nicholas Taleb, author of "The Black Swan: The Impact of the Highly Improbable.”
The drop in compensation for 2011 is expected to be so drastic that it's likely some mid-level bank employees will wind up taking home more than the executives to whom they answer, the result of a compensation structure in which top-level workers earn much of their income via bonuses. Banking industry analysts say financial firms might have to adjust to this "new normal" in which the outsized compensation of the mid 2000s is a thing of the past. Some banks are also adjusting by giving out bonuses in stock instead of cash, which could benefit today's recipients in the future. Bank stocks struggled last year, but if the financial sector recovers and share prices increase, those bonuses could be worth more.