Congress is debating tax rates, and that has Wall Street nervously eyeing the calendar.
Worried that lawmakers will allow taxes to rise for the wealthiest Americans beginning next year, financial firms are discussing whether to move up their bonus payouts from next year to this month.
At stake is a portion of the hefty annual payouts that are a familiar part of the compensation culture on Wall Street, as well as a juicy target of popular anger. If Congress does not extend the Bush-era tax cuts for the highest income levels, a typical worker who earns a $1 million bonus would pay $40,000 to $50,000 more in taxes next year than this year, depending on base salary. Goldman Sachs is one of the companies discussing how to time bonus season, according to three people who have been briefed on the discussions. Pay consultants who work with major Wall Street companies say that just about every other large bank has also considered such a move in recent weeks. With tax politics in Washington unpredictable, bank executives have spent months sketching out several options for their bonus plans, including the possibility of an earlier payout. Lawmakers have been trading accusations across a partisan divide, but after this weekend, it appears likely that a compromise will extend the tax cuts for all income levels. Even so, the banks’ discussions about bonus timing underscore how focused the industry is on protecting every dollar of pay.
A spokesman for Goldman declined to comment. Bonus payouts are traditionally shrouded in secrecy; companies are required to disclose their top executives’ pay, but they do not disclose the size of their total bonus pools in their public filings or internally.
Goldman, not surprisingly, is the canary in the coal mine. It often announces its top executives’ bonuses before other firms, and the richness of its payouts sets the tone across the industry.
This year the tax debate has imposed a new wrinkle, and executives at two large banks said their companies tentatively decided not to speed payouts, unless Goldman did. Then, these two executives said, they would consider paying early as a competitive measure, so that their workers were not upset.
Bonus timing is also being discussed at scores of public companies, beyond banks, for top executives who receive multimillion-dollar payouts around the turn of the year. At most companies outside the financial sector, an early bonus would help only a handful of executives, while on Wall Street, the benefit would apply to many more workers.
“This has been a topic of conversation among those of us who are involved in designing and administrating compensation plans,” said Brian Foley, a pay consultant in White Plains, N.Y. “But I really would be surprised if anyone went down this path. This is a bounce-back year in terms of bonuses going up and probably not the time to draw attention to yourself.” Wall Street firms pay out billions of dollars in bonuses each year. In good years top executives can receive bonuses worth tens of millions of dollars. Even midlevel financial workers often earn above $250,000 a year, and they receive most of their compensation as bonuses paid early in the new year.
Extending the tax cuts for all Americans with taxable income over $250,000 for joint filers ($200,000 for single filers) would cost the country about $40 billion next year, according to the Joint Committee on Taxation, and it would cost $700 billion over the next decade.
Currently the highest rate for taxable income is 35 percent; that would increase to 39.6 percent if the Bush tax cuts expire.
The top
firms have put aside nearly $90 billion for total pay this year, and they are expected to raise that amount using their end of year earnings. That would make this year one of the best ever for bank pay.
As Mr. Foley said, much of the focus within banks is on the appearance of the payouts. Several senior banking executives received either no bonuses or modest ones in recent years, and with the taxpayer-financed bailouts receding, top executives are pushing to be paid well again.
Some compensation consultants have been helping their clients devise new labels for the pay that are less likely to inflame the public. For instance, some banks are considering reducing the amount of their payouts that are labeled as bonuses, and instead shifting some to other categories like “long-term incentives.”
Depending on how banks structure this part of the payout package, it might not represent much of a change for bankers, since it has long been standard practice to tie up some pay for a few years for retention purposes. But, some bankers said, the goal was to make the dollar amounts appear less offensive.
Bankers are also discussing speeding up the way they award company stock, so workers can benefit from this year’s lower income tax rates for those earnings. Many banks pay a substantial portion of bonuses in stock, rather than cash, and companies often have a multiyear delay between when those shares are awarded and when the employees can sell them. The tax bill does not come due until employees sell the shares, or own them outright.
Robert J. Jackson Jr., a professor at Columbia Law School who helped oversee the Treasury Department’s rules on compensation at bailed-out companies, said he would look carefully at footnotes in company filings to see if they accelerated executives’ stock awards. “Even companies who pay in stock instead of cash can structure it to be taxed at this year’s rates,” Mr. Jackson said. “If it does happen, it may be a little tricky to see.” It is not uncommon for Wall Street to consider the tax consequences of its pay practices. Private firms like hedge funds often let workers choose when they’re paid. And until about a decade ago, Goldman allowed its partners to decide whether they received their bonuses in December or January. Back then, Goldman was an investment bank, and like other former investment banks, it closed its books at the end of November, making it easier to pay earlier.
One of the challenges for the banks in paying bonuses early would be coming out with exact amounts before the year is over and before they determine their final earnings — a lengthy process. Banks have in the past found ways to get around rules, or make their workers’ pay look lower than it actually was. For instance, a year ago Goldman capped the pay of all of its London workers at £1 million each. But last summer, Goldman made it up to its partners in Britain, albeit quietly. The bank made dozens of multimillion-dollar stock grants to its partners there, according to a person briefed on their pay who was not authorized to discuss it. Credit Suisse, in similar form, paid its British bankers summer cash bonuses to make up for their lower pay last year.
