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Wall Street's entitlement culture hard to shake

There's still a deeply ingrained culture of entitlement at financial companies. It's a mindset banks will have to work harder at changing as they come to grips with their failures.
/ Source: The Associated Press

John Thain should have known the rules.

After all, when he became CEO of the New York Stock Exchange in 2004, he replaced Richard Grasso — a man who embodied the excesses of the times and was forced out for taking a massive annual pay package of $187.5 million. Thain at the time accepted a much smaller $4 million.

But now, the Wall Street wunderkind is gaining similar notoriety. After he became head of Merrill Lynch in late 2007, he sped up bonuses to several executives before Bank of America Corp. bought the investment bank on Jan 1. He also spent $1.2 million decorating his Manhattan office, according to media reports, as Merrill hemorrhaged money — a decision that's invoking particular rage among Americans, including President Barack Obama. Thain left his post at Bank of America on Thursday after unexpectedly big losses at Merrill Lynch; the bonuses were a likely contributing factor in his departure.

Thain's actions exemplify how hard it is for the industry to wean itself off the hefty paychecks and spending the last decade brought — even as financial companies now rely on taxpayer dollars to stay in business.

Last year, a clampdown by Citigroup Inc. on color copies and BlackBerrys made headlines, showing how the faltering U.S. banks were having to cut back on nonessentials. But analysts say there's still a deeply ingrained culture of entitlement at financial companies. It's a mindset banks will have to work harder at changing as they come to grips with their failures, and as they face more scrutiny after accepting government help.

"You've always had this Wall Street ethic of, I'm going to push the rules as far as I can. That's been part of the culture," said R. Edward Freeman, academic director of the Business Roundtable Institute for Corporate Ethics and Olsson Professor of Business Administration at University of Virginia's Darden School.

The long hours many bankers work help feed an attitude of entitlement, Freeman said.

"I've had former students talk about sleeping under their desks," he said. "This leads to this idea of, I'm entitled to being rewarded. But sometimes, that's disconnected from performance."

And, Freeman added, the government for years gave Wall Street carte blanche.

On Friday, citing the reports "about companies that have received taxpayer assistance, then going out and renovating bathrooms or offices," Obama said the lack of accountability and transparency at financial companies "have to be part and parcel of a reform package if we're going to be responsible in dealing with this economic crisis."

The reports of Thain's expenditures follow news just a few months ago that bailed-out American International Group Inc. spent about half a million dollars for executives to attend a beach retreat in California.

Wall Street employees came to expect big compensation packages as their paychecks kept ballooning year after year.

The difference between wages in finance and wages in other private sector industries was "excessively high" from the mid-1990s until 2006, according to a paper by New York University's Thomas Philippon and the University of Virginia's Ariell Reshef published this month by the National Bureau of Economic Research. The last time the difference was similarly excessive was around 1930, they wrote — right after the stock market crash of 1929.

Many bank CEOs and other executives gave up their bonuses late last year as the government started limiting compensation as part of its Troubled Assets Relief Program. Thain was among them, as were four other Merrill executives — but only after Thain initially sought out a $10 million bonus, The Wall Street Journal reported.

Merrill Lynch paid Thain more than $83 million in 2007 — making him the highest paid CEO on Wall Street that year. The firm then lost more than $37 billion over the course of 15 months and was saved from collapse in a government-brokered buyout by Charlotte, N.C.-based Bank of America Corp.

"Thain is a symbol of the species. It's a breed that I think is going to have to change its habits, at least for a time," said James Post, a management professor at Boston University. "We have lots of students who wanted to work on Wall Street. That lifestyle is not going to be there for most of them, if not all of them, for many years to come."

So far, CEOs and other top-tier executives at banks — from Bank of America to Citigroup to Goldman Sachs Group Inc. to JPMorgan Chase & Co. — have given up their 2008 bonuses after losing billions in bad investments and receiving billions more in government funding.

The major U.S. banks, to be sure, have started slashing other people's bonuses, too — and in many cases, significantly. Morgan Stanley, for example, cut its bonus pool, excluding "financial adviser compensation," by 50 percent in 2008. Goldman Sachs said total compensation (which includes bonuses, salaries and other personnel costs) dropped 46 percent.

And Citigroup recently said it plans to tie executive pay more closely to performance. It spent $6.6 billion on total compensation and benefits in the fourth quarter of 2008 — down 26 percent from the same quarter in 2007.

The changes were slow-moving, though, considering that the institution's problems started escalating in late 2007. For the first three quarters of the year, compensation and benefits were actually higher than in the same period a year earlier, even though Citigroup was losing money. That was before the company received a government bailout.

For all of 2008, Citigroup's spending on compensation and benefits was down 4 percent from 2007 — although its workforce shrank by a much larger 14 percent. That means the company's expenses per worker were rising as the company struggled.

JPMorgan Chase's compensation expenses were unchanged in 2008 compared to 2007, though the bank's payroll grew by 9 percent. The company and Citigroup did not break out how much of their compensation was in the form of bonuses.

Despite efforts to slash bonuses, Wall Street's bonus-driven culture has been tough to shed.

Managers argue that big bonuses are necessary to retain good employees — back in March, after JPMorgan agreed to buy Bear Stearns, it offered cash-and-stock bonuses of as much as 100 percent of annual output to top-performing Bear Stearns brokers.

But those looking from the outside in are skeptical.

"How much does it take to retain good people? The truth is, there are an awful lot of talented unemployed people right now," Post said. "There's a mythology that there are only a precious few geniuses that can run these places."

David Schmidt, a senior compensation consultant at James F. Reda & Associates, agreed that in general, retention bonuses seem unnecessary in an environment where tens of thousands of financial industry jobs have disappeared. Getting rid of all incentives would be unwise, he said, but expectations have to change.

"These executives are coming from, in the view of the world, failed organizations," Schmidt said. "It just looks bad."