How Wall Street calculates those big bonuses

updated 6:54 p.m. ET Nov. 17, 2008

NEW YORK - Wall Street has long operated by one simple pay rule: To the victor go the spoils. If a firm does well, its people do well, getting splashy annual bonuses sometime in December or January.

Checks go to everyone from the CEO to the 21-year-old junior analyst straight from college. In good years, the money can be eye-popping, the subject of wide speculation and envy.

This, however, isn't a good year.

It's been a year of panic on Wall Street, as banks' stocks and profits plunged. Only two large investment banks — Goldman Sachs Group Inc. and Morgan Stanley — are left standing, after Bear Stearns Cos. and Merrill Lynch & Co. were bought by competitors and Lehman Brothers Holdings Inc. filed for bankruptcy.

Goldman announced Sunday that its seven top executives won't get bonuses for 2008, a sharp switch from 2007, when Goldman's CEO alone had total pay of $54 million.

With sums so huge, you may wonder how those bonuses are calculated and who decides who gets what. Here are some questions and answers.

Q: How much money do Wall Street firms devote to pay?

A: Compensation has long been the largest expense on Wall Street. Nothing even comes close.

For instance, in 2007, 44 percent of Goldman's revenues were devoted to paying its employees, with roughly 30,000 people splitting a total compensation pool of more than $20 billion, for an average of $575,000 each.

Goldman's compensation total was nearly twice its fiscal 2007 profit of $11.6 billion.

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Of course, not everyone took home a half-million. CEO Lloyd Blankfein's $54 million payday and comparable amounts paid to other top executives left less for midlevel managers. Still, Goldman made plenty of workers millionaires last year — some earned far more than that $575,000, while some earned much less.

It's likely to do the same, very quietly, this year, as it strives to keep its top performers.

Q: Why are bonuses so large?

A: Base pay on Wall Street is a modest portion of total pay, with senior executives earning salaries from $250,000 to $450,000 — an amount that can more than quadruple during a good year, when bonuses are high.

The argument for rich pay on Wall Street is that investment banks are, in some respects, like law firms: They're only as good as their teams. Because employees are the firms' greatest asset, their pay is the firms' largest expense.

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