Wall Street payments set to break another record

Mark Lennihan, AP

H
ow much Wall Street employees will be earning this year?

For all the griping about how much high-finance executives get paid, the Wall Street Journal reports that banks and securities firms are going to pay their employees record high compensation this year, about $140 billion.

That's a 20 percent increase over last year's $117 billion and even more than the $130 billion in payments they received in 2007.

Bonuses at insurance giant AIG come today before Congress.

The figures illustrate how, despite the continuing problems in the economy, Wall Street firms have been rebounding nicely and believe they need to once again start paying a premium to obtain the best talent. Ultimately, though, this is just an educated guess by the Journal. The paper analyzed the numbers from 23 top investment banks, hedge funds, asset managers, and stock and commodities exchanges to come up with its estimate.

The paper acknowledges its figures could end up being inaccurate if financial firms give in to what will undoubtedly be strong public and political pressure to tamp down the bonus pay. Also, several of the firms analyzed will surely face restrictions from the pay czar.

Still, it's a vivid illustration of how, long after the crisis hit, there is little that can stop the vast majority Wall Street firms from handing out millions in payments to employees. One corporate governance expert told the Journal, "Compensation played a role in the financial crisis and yet, nothing has changed."

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A year ago, the Journal reported that "scores of companies" were quietly converting their pension plans into resources to finance their executives' retirement benefits and pay. And they were doing that while freezing pensions for their workers.

   In recent years, companies from Intel Corp. to CenturyTel Inc. collectively have moved hundreds of millions of dollars of obligations for executive benefits into rank-and-file pension plans. This lets companies capture tax breaks intended for pensions of regular workers and use them to pay for executives' supplemental benefits and compensation.

   The practice has drawn scant notice. A close examination by The Wall Street Journal shows how it works and reveals that the maneuver, besides being a dubious use of tax law, risks harming regular workers. It can drain assets from pension plans and make them more likely to fail…

   How many is impossible to tell. Neither the Internal Revenue Service nor other agencies track this maneuver. Employers generally reveal little about it. Some benefits consultants have warned them not to, in order to forestall a backlash by regulators and lower-level workers.

   The background: Federal law encourages employers to offer pensions by giving companies a tax deduction when they contribute cash to a pension plan, and by letting the money in the plan grow tax free. Executives, like anyone else, can participate in these plans.

   But their benefits can't be disproportionately large. IRS rules say pension plans must not "discriminate in favor of highly compensated employees." If a company wants to give its executives larger pensions -- as most do -- it must provide "supplemental" executive pensions, which don't carry any tax advantages.

   The trick is to find a way to move some of the obligations for supplemental pensions into the plan that qualifies for tax breaks. Benefits consultants market sophisticated techniques to help companies do just that, without running afoul of IRS rules against favoring the highly paid.

Meanwhile, AIG is poised to pay out huge bonuses and there might not be anything anyone can do about it.

New Yorker Magazine

Kenneth Feinberg, the Obama administration's pay czar has asked AIG to

reduce $198 million in promised payments for next year and get back $45 million of what has already been paid this year. AIG has agreed in principle, but Feinberg can't really force anything since these bonuses were agreed to before the company got a massive bailout courtesy of the taxpayer. In the end, all Feinberg has the power to do is pressure companies to renegotiate bonuses that had already been agreed to, and cut future pay.

So far, the company has received only $19 million of the $45 million it paid out back in March, mainly because employees don't want to give back the money without assurances of how much they will be making next year. If AIG doesn't manage to come up with the money, Feinberg is apparently ready to cut 2009 salaries to make up the difference. Meanwhile, company officials claim all this uncertainty over pay has made it difficult for AIG to attract, and retain, top talent.