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Wall Street finally gets the message on pay

Goldman Sachs and its peers on Wall Street are finally waking up on pay. Three of the top U.S. banks this week unveiled a variety of measures that directly or indirectly benefit shareholders after years of putting employees first. More can still be done, but these are encouraging signs of a new attitude about compensation.

The headline grabber on Wednesday was the decision by JPMorgan's board to dock chief executive officer Jamie Dimon's pay after the chief investment office's loss of some $6-billion (U.S.) on credit derivative "whale" trades. At $11.5-million, he's getting just half his 2011 compensation. That's the kind of punitive action needed to reassure investors that misdeeds won't be treated lightly.

Meanwhile, Morgan Stanley is set to impose added bonus deferrals on many of those earning over $350,000 a year – and none of it will arrive in this month's checks. Cash, which makes up half of bonuses, will be paid out in four equal parts in May and December this year and at the end of 2014 and 2015. Half the stock awards will be doled out at the end of 2015, with the remainder split between the end of this year and next. It should discourage risk taking by tying performance to medium-term results and make the rewards easier to claw back if warranted.

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But it is Goldman's move that is probably most significant. The bank led by Lloyd Blankfein slashed compensation to just under 38 per cent of revenue for 2012, after having held it around 42 per cent in the last few years even as return on equity languished in single digits and presumably below the cost of Goldman's capital. The fourth-quarter pay cuts helped push the return figure to 10.7 per cent for 2012.

There's more work to be done in the pay arena. JPMorgan's board, for example, could have been tougher still on Mr. Dimon. Morgan Stanley will need to reduce absolute pay levels to make the deferrals truly resonate – and deferring more pay means having to earn enough in the future to cover the cost. And Goldman could have afforded to pass more from bankers to shareholders. But maybe the positive feedback in the market will encourage the compensation restraint to continue.

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