Wall Street Bonus Pay Outpaces Base Salary Group Disability Insurance Covers

The incentive compensation that separates two people at the same Wall Street title rises and falls with performance, while base salary generally rises about 3 to 3.5 percent a year, according to Alan Johnson, managing director of Johnson Associates. Disability insurance for Wall Street professionals is a personally owned policy, a form of disability insurance for financial services executives, that stays in force when employment changes and is not tied to the definition of covered earnings a group long-term disability plan uses to calculate its benefit.

Four years of raises at that pace adds about 14 percent, while incentive compensation is not paid on a fixed schedule and can rise much faster in a good year or not at all. A group plan that calculates its benefit on base salary leaves that bonus compensation, a large part of total compensation in financial services, outside the benefit.

Disability Insurance for Wall Street Professionals Depends on Base Salary Versus Total Compensation, Not Title

Base salary on Wall Street is set by title, firm-wide, within a narrow band, so the bonus is what separates one professional from another at the same level. It is also the part a group plan calculated on base salary alone was never designed to measure.

Firms keep fixed costs down on purpose and pay most of the compensation as incentive. Firms design pay to reward performance, and the result is a larger share of real income outside the number an employer plan insures.

The gap grows with seniority, because salary levels off while the bonus keeps rising.

“Once you get to be kind of a managing director or partner, your salary is pretty much fixed. And again, in the real world, $500,000 is a lot of money. But if you’re making millions, it’s a small portion of what you get.”

Alan Johnson, managing director of Johnson Associates, which publishes semi-annual projections of incentive pay across the financial sector and advises banks on what to pay their people, said so in an interview for the Income Protection Journal report “Disability Coverage Stops at Base Salary.”

An illustration shows the scale. A professional earning $600,000 in total compensation on a $250,000 base would see a standard group plan replace roughly $12,500 a month, which is 60 percent of the base and a quarter of the money earned.

Income Protection for Wall Street Professionals in Financial Services Depends on Year-End Bonus Mix

Banks and private equity firms run roughly similar mixes. A hedge fund pays a higher percentage of compensation as bonus and a smaller base, and hedge funds, private equity and venture capital all pay a larger share outside covered earnings.

Someone at a hedge fund earning comparable total compensation on a smaller base might be insured for $90,000 to $150,000 under a plan that replaces 60 percent of base salary. The same percentage produces a different benefit because the pay mix is different.

Investment bankers earn a base that stays largely flat across deal cycles, while a year-end bonus tied to closed transactions can be several multiples of that base. Quantitative analysts combine base salary, a discretionary bonus and, at some firms, a share of strategy performance. Both face the same covered-earnings exclusion.

Individual underwriting reads the mix differently. Underwriters classify a professional by actual duties, not the technical nature of a title, and the underwriter’s classification sets the coverage ceiling. One carrier’s underwriting guide lists investment bankers, stockbrokers and portfolio managers in its standard tier, while hedge fund managers and venture capitalists require individual underwriter consideration.

Individual disability insurance underwrites to actual earned income rather than a flat employer ceiling. That is why the same professional can qualify for a very different benefit under an individual policy than under an employer plan.

The two kinds of coverage diverge on four points that matter most to a financial services professional. They are how long the own-occupation definition lasts, what income the plan insures, how the maximum monthly benefit is set and whether the benefit is taxed.

Group coverage is attached to the job. It ends when the employment does, and the next employer’s plan comes with its own earnings definition, its own maximum and, commonly, a limitation on any condition treated shortly before the new coverage began. An individually owned policy is not attached to the job, so it stays in force when the insured changes employers.

Residual Disability Riders Pay a Share of Lost Income When Bonus Compensation Falls Before It Stops

Variable pay rarely ends all at once, and a residual disability rider is designed for pay that shrinks. It pays a share of the base benefit in proportion to the share of earnings lost, which suits compensation that varies with performance.

In the specimens and underwriting guides reviewed, the residual riders at all five standard carriers can pay without a prior period of total disability. Enhanced versions at some carriers add a recovery benefit that continues payments after a return to work while earnings remain reduced.

Most people skip the question for a simpler reason.

“I’m invincible, I’m not going to need the coverage. That statement’s actually true for a lot of people, but it’s a significant risk to not have it.”

Andy Schafer, vice president of Workplace Benefits Solutions at a national insurer and an actuary who spent 24 years pricing disability insurance risk, said so on the Income Protection Journal Podcast.

Three questions frame the choice for a bonus-heavy professional. They are what share of pay the employer plan insures, how a carrier classifies the role by duties, and whether a residual rider covers pay that shrinks before it stops.