Top Earners and Top Executives

March 4, 2009

Can we nail down exactly what a "top executive" is? It would help make sense of stories such as the one on Merrill pay in today’s WSJ:

While Merrill staggered, 11 top executives were paid more than $10 million in cash and stock last year, say people familiar with the situation…
Some of Merrill’s senior executives, including John Thain, the firm’s former chairman and chief executive, got no bonuses in 2008. But information reviewed by the Journal shows that some traders and investment bankers faced only small pay cuts last year, even though the Merrill units they ran posted significant losses.

When the US government started talking about paycuts for banks’ "top executives", it seemed at the time that they were talking only about the top four or five C-suite officers of the company. When the press uses the term, however, it seems to mean "anybody at the company who makes a lot of money".

The WSJ reports that "David Gu, head of Merrill’s global-rates division, made $18.7 million in 2008" — but Gu doesn’t even appear on Merrill’s old "executive management team" list, which includes no fewer than 34 different names. Merrill’s top earner, Andrea Orcel, is on the list, but only in 13th place. And I suspect that many of the 11 eight-figure earners were either on guaranteed bonuses or were traders with essentially no executive role in the company.

Which is not to say that they deserved their bonuses, of course. If the company you work for loses billions of dollars every quarter of the year, then you can’t reasonably expect that company to give you a whopping great bonus, even if you personally did well. Which makes this datapoint particularly shocking:

Merrill’s 10 highest-paid employees got a total of $209 million in cash and stock in 2008, up slightly from $201 million paid to the top 10 a year earlier, according to the figures reviewed by the Journal.

Investment banks still run on the star system: as in sports teams and television studios, the best-paid non-executives often earn more than the people running the show. It would be great if this crisis put an end to such shenanigans, since that kind of pay structure was a key reason for the instability of the financial system as a whole: it encourages traders to make highly-leveraged bets. Which means that there’s a strong case for the reintroduction of the "Couric rule", at least at financial institutions.

But I still think it’s useful to draw a distinction between a bank’s top earners, on the one hand, and its top executives, on the other. Sometimes, they’re the same. But a lot of the time they’re not. And while it’s entirely justifiable to bemoan enormous bonuses for the former, it’s a lot easier to attack enormous bonuses for the latter.

Reprinted from

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