CORRECTED-ANALYSIS-Big funds seek to rein in pay at Wall Street banks

Reuters Middle East

(Correct's paragraph 30 to fix spelling of names: Nelson

Peltz's Trian Fund Management)

* Bank profits have declined much more than executive pay

* Mutual funds, pensions seek bigger slice of shrinking pie

* Analysts say times have changed, pay cuts, layoffs needed

Oct 4 (Reuters) - The days when Wall Street banks could

blithely hand out half their revenue in compensation to their

staff without a murmur from shareholders have come to an end.

In an era of leaner times and tighter regulation, big mutual

funds and pensions are growing more vocal in pushing executives

at investment banks to rein in pay and bonuses and consider more

staff cuts. Investors worry that bank employees are getting too

big a piece of a shrinking pie, leaving shareholders a much

smaller slice.

So far, much of the jousting is taking place behind closed

doors. But the debate over whether investment banks should keep

devoting roughly 50 percent of revenue to employee compensation

is starting to enter the public realm through proxy battles and

as more large shareholders speak out on the issue.

"Sometimes executives are being rewarded immensely for just

sitting in their chairs, just coming into work every day," said

Aeisha Mastagni, an investment officer at California State

Teachers' Retirement System, which manages $154 billion in

assets. "There is a need to conform to truly performance-based


Wall Street pay was not a big concern to investors when

investment banks were highly profitable and shareholders were

reaping benefits too, Mastagni and other investors said. But

large shareholders are becoming more vocal because earnings no

longer justify compensation at pre-financial crisis levels.

Last year, Morgan Stanley executives came under fire during

some investor meetings, according to one person who attended

those meetings but was not allowed to discuss them.

At one meeting, he said, "furious" representatives from

mutual funds who were among the bank's 10 biggest investors

sharply questioned executives, including the chief financial

officer and head of investor relations, asking why Morgan

Stanley could not cut compensation to about 30 percent of


Wesley McDade, a spokesperson for Morgan Stanley, which has

paid out 51 percent of revenue for compensation the past two

years, did not initially offer a comment on the matter.

But later on Thursday, Morgan Stanley Chief Executive James

Gorman told the Financial Times that the bank was planning to

consider lowering pay and bonuses in its next round of


"There's way too much capacity and compensation is way too

high," Gorman was quoted as saying.

Gorman told the paper that traditionally Wall Street kept

compensation ratios flat when revenues went up but increased the

ratio when times were bad, arguing they needed to retain people.

"That's a classic Wall Street case of 'Heads I win; tails,

you lose'. The current Wall Street management is a little

tougher-minded about that and shareholders are certainly

tougher-minded," he told the paper.

When asked about Gorman's comments, McDade, the bank

spokesman, said he did not dispute the Financial Times story.

Jeff Harte, an equity research analyst at boutique

investment bank Sandler O'Neill, who often organizes meetings

between investment bank executives and investors, said

compensation has been "a theme in management meetings."

"Investors are saying, 'We're past the crisis; you guys

still have low returns'," Harte added. "At what point do you

admit that this is the new normal?"

Mastagni said some large Wall Street banks, such as Goldman

Sachs Group Inc and JPMorgan Chase & Co, have

begun reaching out to shareholders to explain their rationale

for compensation decisions. She said the outreach is welcome but

CalSTRS is looking for banks to act more decisively on pay.

"I'm not sure that we could agree with the fact that 50

percent of the revenue should be going to the employee base,"

said Mastagni. "That's just very difficult for us to come to

grips with."

With tougher talk from big shareholders, the balance of

power may be shifting from bank employees who use capital to the

asset managers who supply it. The longer banks suffer from weak

earnings, the harder it will be to ignore shareholders on pay.

Bank executives have been delaying big changes to staff

levels or compensation for as long as possible, hoping economic

growth will pick up and trading volume will rise.

Wall Street banks say they are worried that if they slash

compensation, top talent may flee for hedge funds and private

equity firms. If they cut staff, it can be more expensive to add

workers again when markets improve. Also, layoffs can actually

boost near-term compensation costs because of severance.

But investors say the problems keeping profits down may be

more permanent than banks acknowledge. In addition to the weak

economy and low trading volumes, new regulations and higher

capital requirements have cut into returns in fixed income and

equity trading.

Trouble in trading is one of the biggest factors behind

depressed bank earnings. It was a big reason Goldman Sachs

earned just $4.4 billion last year, a 60 percent decline from

fiscal 2007.

Those earnings represented a 6.6 percent return on common

equity - a measure of how effectively the bank wrings profit

from its balance sheet by comparing net income to common equity.

Investment banks have historically aimed for more than 15


"People are starting to get the idea that investment banks

right now aren't run for the investors - they're run for the

bankers," said Ralph Cole, a portfolio manager at Ferguson

Wellman Capital Management, which manages $3.2 billion.


Compensation is the biggest expense for most investment

banks, so cutting pay is a logical way to boost returns.

But for Goldman to have earned a 15 percent return on equity

last year, it would have had to pay just 15 percent of its

revenue to employees - far less than the 42 percent it did pay.

Wall Street executives contend that cutting pay to even 30

percent of revenue would cause a massive flight of talent and

evaporate profits, hurting shareholders even more.

But many investors have little patience with these

arguments. If employees cannot generate high enough returns for

their banks, their pay should be cut, multiple hedge fund,

mutual fund and pension fund investors told Reuters.

Some shareholders have taken dramatic steps.

Nelson Pelt z's Tr ia n Fund Management LP acquired a 5 percent

stake in investment bank Lazard Ltd this year, then

pushed management to slash compensation, a demand the bank is

heeding. Lazard has one of Wall Street's highest

compensation-to-revenues ratios, typically paying employees more

than 60 percent of revenue.

Jefferies Inc shares have dropped nearly 12 percent

since executives were grilled about compensation on an earnings

call last month. Since 2009, the investment bank has spent a lot

of money luring bankers and traders from larger rivals with big

pay packages that are guaranteed for years, making it difficult

for Jefferies to cut expenses. It paid out almost 60 percent of

revenue to employees last quarter.

At Citigroup Inc, shareholders voted against CEO

Vikram Pandit's pay package at an annual meeting in April. But

the vote was nonbinding and his compensation did not change.

Citigroup has been the only big bank to face such a rebuke under

a new say-on-pay rule.

Some banks have conceded that times have changed. Deutsche

Bank AG last month said it was cutting bonuses, axing

jobs, and spending less of its revenue on pay.

"The payout ratio, it's got to go down," said the bank's

co-Chief Executive Anshu Jain about the level of bonuses.

"Employees must make their contribution."

(Reporting By Lauren Tara LaCapra and Dan Wilchins; Editing by

Martin Howell and David Gregorio)

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