The New York Observer, December 25, 2000

By James Verini

Kerry Sulkowicz, a psychiatrist and psychoanalyst, has his hands full this time of year. And it’s not just because the holidays are tough.

Dr. Sulkowicz specializes in issues of money and power, and counts among his patients many of Wall Street’s deal-makers and market players. And these bankers and traders — members of a species not exactly known for introspection or self-flagellation — may find themselves spending some extra time on the couch during these cold winter months.

It is, after all, bonus season.

This is the time of year when those whose moods rise and fall with every tick of the Nasdaq will receive the number that determines both their net worth and their self-worth. It’s the time of year when those who want to be Big Swinging Dicks on the Street will either receive the validation they’ve been waiting for or find themselves cut down to size.

“Bonuses are not just money,” said Dr. Sulkowicz. “For some whose self-esteem isn’t all that sturdy to begin with, a bonus is a means of measuring self-esteem through an external set of factors.”

The competitive instinct that drove these people to Wall Street in the first place becomes even stronger as bonus day approaches. According to Dr. Sulkowicz, what’s at stake for the men is nothing less than their masculinity. “It’s a variation of the locker-room conversation — you know, ‘Mine is bigger than yours,’” he said.

Size does matter for women too, Dr. Sulkowicz adds. “I can assure you, they are just as concerned as the men are.”

Of course, that is how bonus season plays out in a normal year. This year — the start of a strange new millennium that saw the Dow Jones and the Nasdaq reaching unforeseen new heights in the first quarter, then sliding into an autumnal fall that hasn’t yet ended (even with the election of a Republican President) — is not a normal year. Bonus anxieties are reaching new highs.

According to data from Johnson Associates Inc., a compensation consultant, corporate vice presidents this year can still expect bonuses of about $1.1 million, directors about $1.5 million, research directors about $2.75 million and managing directors around $3.8 million — and those are just the median statistics.

But this year, the bonus picture is much more complicated than that. Industry consolidation, the decimation of the high-yield markets, weaker M. & A. performance and, especially, the bursting of the Internet bubble — all make it harder than ever for Joe or Jane Wall Street to figure out how he or she measures up. Add in stay-put bonuses and a near insurrection by junior bankers and brokers, and the confusion evolves into self-loathing at ranges the Nasdaq can’t touch.

“I think that before the crash last year in the Nasdaq, there was a fantasy for a few years of invincibility, a fantasy of omnipotence,” Dr. Sulkowicz said. “The bubble burst — and whenever there’s a lost powerful fantasy, there’s a feeling of being vulnerable.

“These people don’t have control over how big their bonus is,” he went on, “but they feel that they should. A lot of the pressure they put on themselves takes on a self-punitive quality. People say things like, ‘I’m gonna hate myself if I don’t get a big bonus.’”

Dr. Sulkowicz said the attitude out there is best understood by studying toddlers. “If you look at little kids, say ages 2 or 3, they have a feeling of omnipotence, “he observed. “They are the center of their world and they can control their world. They don’t have to deal with that much frustration. Then, through the normal process of development, they have to face inevitable disappointments. That’s kind of what’s happening in our economy.”

In other words, this may be the year the bonus babies grow up.

Rabble Rousers

Until that happens, there’s going to be a lot of skirmishes in the playground. Blame the firms for that.

To keep their top performers from defecting to other banks or to Silicon Valley, companies have been offering unprecedented compensation to a select few. These top performers will make more money than ever this year.

Everyone else? According to compensation experts, the gap between the elite and the rabble will grow even wider. “You pay your top performers, and then you pay what you promised everybody else,” says Andrea de Cholnoky of the headhunting firm Spencer Stuart. “Do you have enough for everybody? Maybe not. Long-time employees and average performers will get squeezed.”

Consolidation within the securities industry, coinciding with the re-emergence of the lone-wolf banker, have made the whole idea of firm loyalty seem positively quaint.

“In this consolidating business, having top performers and having enough of them is everything,” said Ms. de Cholnoky. So in the mid- to late 90’s, firms began to offer more and larger incentives to keep the stars in their seats.

One big perk, once rare but now quite common, has been the practice of awarding years-long contracts and guarantees of future bonuses — “stay-put” bonuses, Ms. de Cholnoky calls them. The few hundred best-compensated directors and managing directors on Wall Street can now expect a two-to-five-year contract that includes minimum guaranteed cash, stock-option bonuses and additional performance-based bonuses — packages that add up to tens of millions of dollars.

But counterbalancing that trend are the youngsters, who also are being wooed to stay put. Contracts, bonus guarantees and the raising of base salaries — by up to 20 percent at some firms, to as much as $125,000 (or more) a year for young analysts and associates — are part of the New Economy.

But word on the Street this year is that the Wall Street babies are starting to fuss. According to one Wall Street source, associates who learned their bonuses in early December “experienced 30 to 40 percent less than expectations.”

Maybe they just expected too much. Blame Paul Leung for that. In April, the Salomon Smith Barney Inc. analyst presented senior management with a laundry list of compensation and quality-of-life demands — and shocked Wall Street when they were granted. The result has been a sense of entitlement on the part of junior bankers.

“It’s been 10 years since we’ve seen a major down cycle,” observed one veteran senior banker. His junior colleagues, he said, “have only seen things go up. As a result, they have more attitude and more expectations of getting paid a lot.

“I don’t think they have the right to make all these demands about what they should get or how they get paid,” he went on, “or what kind of work they do, or how hard they work. It reminds me of the attitude analysts had in the late 80’s.”

Or, as Dr. Sulkowicz said, of toddlers.

Mind Games

But the bonus recipients say they’re the products of dysfunctional families: The firms they work for play such mind games that even the most self-confident employee can’t help reaching for the Xanax.

“Of course, you’re always nervous before bonus time,” said a senior banker at a second-tier firm. “You have a sense of a range, more or less, but you just never know. It’s so tense because you don’t really know exactly how it works and what the big arbiters are.”

One bonus baby complained: “People who are vastly inferior to me get paid more because they’re better at dealing with the process.”

The Process … the “Year-End Process,” is what they call it at Merrill Lynch & Company, reducing the tension-filled period to benign B-school doublespeak.

“There’s a kind of passive agreement for bosses and employees to be in denial of all the behind-the-scenes action at this time,” said Dr. Sulkowicz. “Employees are job-hunting, calling headhunters, grumbling about work and planning to quit, which is denied by the employers. At the same time, the employers spend a great deal of time not talking about business, but about the people who work for them and divvying up the pool. In some companies, this can lead to paranoid-like atmosphere.”

The bosses do their best to lower expectations.

“Let’s put it this way,” said the banker. “They’re definitely not coming in and saying ‘Hey, we found an extra couple hundred million dollars in the bonus pool, look at this!’”

“They’re amazingly good at finding excuses not to pay you,” echoed a trader at a bulge-bracket firm.

Management, however, is not above trying to convince each employee that they’re loved just a little bit more than the next.

“The Human Resources theory is that people care about absolute number, but care even more about relative number,” one trader observed. “They always try to make you feel better by comparing you to other people.

“They’ll try to say, ‘You’re up 20 percent from last year, other people are down 50 percent,’” the trader went on. “But … they’ll compare you to some guy that’s been paid a million bucks a year; for the last five years and is now getting paid $500,000. Well, that’s kind of like the wrong comparison — like you screwed me in a year where I should have doubled or tripled my comp as part of the early acceleration of my career, and you’re trying to compare me to some guy whose been getting paid through the roof for several years. That’s ridiculous.

“The attempt to manipulate you is always so obvious they usually end up insulting your intelligence,” he concluded.

And when the comparison strategy fails, there’s always obfuscation. In bonus sessions at one bulge-bracket firm, bankers receive a piece of paper with a number on it that includes not only stock but the value of whatever private equity funds the bankers might have invested in throughout the year. So it’s an inflated number, explained one director, “meant for sticker-shock, so they can give it to you and say, ‘Look how much fucking money we’re paying you!’” The bankers then need to put their number-crunching skills to work to find out how much their bonuses are really worth.

According to the bitter trader, managers also try to delude their employees with so-called talking points.

“You’ll be expecting X, and they [want to] pay you 0.9X, and you’ve told them: ‘Look, I’m expecting X, and if you pay me 0.9X, I’ll feel like you’re being cheap and stupid and gypping me. And if you pay me 1.1X, I’ll feel like you’re going out of your way to make me happy because you appreciate me.’

“And then they’ll go and pay you 0.9X and say, ‘This is a really positive message.’ And you’re like, ‘No, it’s not! I told you what message 0.9X is. You know it, I know it, fuck you.’”

Of course, the luxury of speaking so candidly is limited to those who are willing to walk out on the firms they feel don’t appreciate them enough. That might have been easy to do even a year ago. But in this uncertain market, many are thankful enough just to have a job.

And so, for those on the receiving end of the bonus game, more subtle bargaining tactics are required. “When you sit there with your manager, you are advised to look somewhat disgruntled,” said another trader. “If you sound overly gleeful, your manager will be like, ‘Oh, well, maybe next year we can get away with less.’ But you don’t want to seem too disgruntled, or people will be like, ‘Jesus Christ, no matter how much we pay him, the guy’s not happy — maybe next year we won’t pay him anything.’”

And adding to the tension, of course, is the mine-is-bigger-than-yours syndrome. “There’s a lot of misinformation,” said one banker. Like A students at the top of the class, those who get the most tend to keep it to themselves.

There’s also the spouse factor.

“Most people don’t tell their wives,” the director said. “One, because they’d blow it all at Prada. Two, when you get divorced, they’ll know how much money you’ve got.” Others have girlfriends and don’t want the wife to wonder where the money’s gone.

This banker is not married, but he still keeps his number to himself: “I don’t want my brother calling and asking me to pay for his kids’ education or something like that.” Another saves the information for his shrink: “I want to tell someone, and I know he has to keep quiet about it.”

But for every quiet banker there’s a bragging jerk. Or a faker. “I’ve seen people I knew were not getting paid as much as they said then go on to other jobs at other firms and get paid very well,” another banker lamented.

New Reality

But in the office, as in the stock market, it’s getting tougher and tougher to inflate valuation. Chase Manhattan Corporation, J.P. Morgan & Co. and Bank of America have all warned that earnings will be well below expectations. Deutsche Banc Alex. Brown has been downgraded by many analysts. After a stellar first quarter and a respectable second quarter, revenues at most bulge-bracket and second-tier Wall Street firms have been on the slide.

Research from Goldman Sachs estimates that the value of deals done by mergers and acquisitions groups — the darlings of many investment banks — has decreased by more than 56 percent industry-wide since the summer. Capital raised through the bond market has shrunk by 23 percent. “It would be naive to think that the lack of investment banking revenues [in the last two quarters] would not affect entire institutions,” said Drew Mandler of Smith Handley Associates, a headhunting firm.

With bank stock prices falling, those with bonus contracts see the value of their stock options dropping as well. Richard V. Smith, a senior compensation consultant at the Hay Group, estimated that the average banker’s year-end bonus will be down by 5 to 6 percent this year. “And you’ll see even a bigger drop next year,” he added.

Those in the low figures on the compensation ledger might see this as a sign of even worse things to come.

“Firms are going to have to pare down certain costs,” said Eric Stieglitz of the headhunting firm Conspectus Inc. “We’ve had real over-capacity in the industry … There will be individuals who are viewed as nonproductive, and they will either lose a lot of their bonus or they’ll be asked to leave — or they’ll just drift out.”

With such a dismal scenario, is it any wonder that Dr. Sulkowicz is busy? And who can ignore the symbolism of the Dec. 14 Christie’s auction, when more than $2 million worth of gold recovered off the Carolina coast was put up for sale.

That gold went down in 1857, when the S.S. Central America sunk off the Carolinas, taking with it 425 lives. The non-human cargo actually comprised one-fifth of the gold then held in Wall Street’s banks, worth $1.65 million in those days. Losing it set off the Panic of 1857.

Memo to the bonus babies: It’s not time to panic. Yet.