Crash Cuts Into 1987 Bonuses on Wall Street

The Oct. 19 stock market crash will shrivel the year-end bonuses paid to investment bankers but isn’t likely to hurt executive income in other businesses, compensation experts say.

Since most bonuses are tied to performance and profitability, which generally have been improving this year, the vast majority of recipients will get at least the same amount they did in 1986, interviews with a number of business consultants suggest.

“As long as companies are performing well, you’ll see bonuses,” said Michael Emig, a compensation specialist at Wyatt Co., a large benefits consulting firm in New York. “On Oct. 20th, most companies were still performing the same way they were performing on Oct. 19th.”

On Wall Street, however, the crash that obliterated $500 billion in U.S. stock value overnight has been reverberating through the investment banking community via layoffs, heavy trading losses and consolidation.

Although the actual extent of damage will not be known until early next year when investment firms tally their 1987 figures, it is likely that the bonuses paid to Wall Street executives--which can range from 5% to more than 200% of their base salary--will shrink drastically, analysts say.

For example, a freshman investment banker out of Harvard Business School making at least $60,000 a year in base salary may lose about $15,000 or $20,000 in bonuses. A senior partner with many years’ experience, whose salary often can exceed six figures, could lose several million dollars in bonus money.

‘Taken a Big Hit’

“The whole investment-related industry will be most directly hit,” said Peter Egan, a partner at Hewitt Associates, a Chicago-based consultancy on compensation and benefits.

Last week, for instance, Kidder, Peabody & Co. said it would slash bonuses by 20% this year because of a restructuring plan that was expedited because of the crash.

Reports also have surfaced that bonuses at Drexel Burnham Lambert probably will be reduced to an average of 7.5% of base pay from 35% in 1986. At Goldman, Sachs & Co., bonuses may be cut to 23% of base pay from 25% in 1986.

Charles Peck, a compensation specialist at the Conference Board, a New York-based business research group, said that in addition to getting lower cash rewards, many investment executives will suffer because their compensation also is paid in the form of stock options, or contracts to buy stock at predetermined prices.

“These executives have taken a big hit because they’re sitting there with stock options considerably above the market price of the underlying stock.” Peck said. “They would be fools to exercise them.”

Even companies that do well in 1987 may confront the ticklish problem of justifying bonuses to shareholders who lost a substantial amount of wealth in the crash.