economics

January 16, 2010

Compensation drops at J.P. Morgan’s investment bank

Filed under: Uncategorized — ktetaichinh @ 9:46 pm
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SAN FRANCISCO (MarketWatch) — Compensation dropped sharply at J.P. Morgan Chase’s investment bank during the fourth quarter amid controversy ahead of bonus season on Wall Street.

The investment bank reported $549 million in compensation expenses in the latest period, down 80% from the third quarter and 53% from the fourth quarter of 2008.

Compensation was 11% of the division’s net revenue in the latest fourth quarter. That compares to a ratio of 37% in the third and second quarters of 2009 and 40% in the first quarter.

For 2009 as a whole, the compensation ratio was 33%, a big drop from 2008, when the ratio was 62%.

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J.P. Morgan Chase’s retreat sets bearish tone for the banking sector. Bank’s report of higher profit is overshadowed by CEO Jamie Dimon’s cautious remarks. Greg Morcroft reports.

“The public controversy about compensation probably led to extra downward pressure on compensation ratios,” Chris Kotowski, an analyst at Oppenheimer & Co., wrote in a note to investors after J.P. Morgan’s /quotes/comstock/13*!jpm/quotes/nls/jpm (JPM 43.68, -1.01, -2.26%) results on Friday. “It certainly has to have had an impact on Wall Street compensation expectations.”

Wall Street pay has always been controversial. But the issue has become even more contentious since the government spent hundreds of billions of dollars bailing out some financial institutions during the 2008 financial crisis. See MarketWatch’s Special Report – Pay Dirt.

The effort averted a deeper recession, while huge interest rate cuts by the Federal Reserve triggered a surge in equity and corporate bond markets. That helped investment banks generate massive profits in 2009. Such performance triggers big bonuses, but this time round many critics of the industry claim the coming payouts are mostly the result of government support, rather than trading skill or astute credit analysis. Read about ‘glacial’ change in the world of Wall Street pay.

J.P. Morgan Chief Financial Officer Michael Cavanagh said Friday that the investment bank’s compensation was cut in the fourth-quarter by several factors that may not last.

The bank reduced some compensation to offset the impact of a British tax on bonuses, the CFO said. It has also increased the amount of equity that will included in compensation, he added during a conference call with analysts.

These changes cut the compensation ratio at J.P. Morgan’s investment bank by a couple of percentage points, Cavanagh noted.

In future, compensation will be roughly 40% of net revenue at the investment bank, the CFO said.

J.P. Morgan Chief Executive Jamie Dimon said the investment bank has always paid a large portion of compensation in stock, rather than cash. This year, the equity component will be “a little bit higher,” in line with recommendations from regulators, he added.

“It’s basically in line with all of the G20, FSA, IFF, Federal Reserves, FSVs and all of the other acronyms you come up with,” Dimon said, according to a transcript of the conference call.

Alistair Barr is a reporter for MarketWatch in San Francisco.

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