Coming to Wall Street: Slave Wages

The Wall Street Journal reports that investment bank UBS will be capping the cash compensation of the employees in its securities arm at a mere $750,000, with any additional amount paid in…..stock.

The interesting part of UBS’s move is that it is making it so explicit within, and therefore outside the firm. I wonder whether UBS has the secondary objective of sending a messagel to the rest of the Street. In industries like airlines, price signaling is a fine art.

From the Wall Street Journal:

The Swiss financial giant has told investment bankers and traders on Wall Street and elsewhere that their 2007 cash pay will be capped at $750,000, with a much greater portion of their total compensation coming from stock than in other years. Previously, there was no limit on the cash amount they could get paid…..

Securities firms and banks “are trying to save as much cash as they can,” says Gary Goldstein, president of Whitney Group, an executive-search firm. “It’s a sign of the environment we are in,” he says, adding: “I wouldn’t be surprised if others follow.”…

One point of paying employees with greater amounts of stock is to give them an incentive to stay at the firm. That’s because the stock typically vests over several years and employees forfeit the shares if they leave beforehand.

But some executive recruiters say the UBS move could hurt morale at the firm. “I’ve been in the business since 1978 and have never seen a firmwide cap on cash compensation that low,” Mr. Goldstein says. Some bankers and traders get pay packages totaling $5 million or more, meaning that stock will account for nearly all of the pay they will receive.

Goldstein’s comment may technically be accurate but is misleading. The late 1970s and early 1980s were terrible years on Wall Street. Bond trading was a making the transition from being a sleepy backwater to an active, capital-intensive business, and equity trading and public offerings were casualties of stagflation. Commodities and oil industry M&A were the two bright spots.

At Goldman, which then as now was the best paying firm on the street, top non-partner comp in investment banking in the early 1980s was rumored to be in the $700,000+ range, and a portion was deferred one year. There certainly was no cap, and I do not know if non-partner on the trading side was paid more.

New partners took a substantial cash comp cut (this was a brilliant element of firm design at Goldman) and had to work to increase their stake in the firm to get a decent income). Senior partners no doubt did better than top VPs, but the line at Goldman in those days was the partners lived poor and died rich. Most of the partnership earnings was retained in the firm.