Opinion

Felix Salmon

The politics of pay on Wall Street

By Felix Salmon
September 13, 2010

London fund manager Barry Olliff seems to be on the same page as Silicon Valley venture capitalist Ben Horowitz when it comes to paying employees.

Here’s Olliff:

Selfishness creates an attitude of negotiation at the point of salary, bonus and option notification. At City of London we do not negotiate any aspect of remuneration…

If we are genuine in wishing to create a team culture then there is a need to treat employees as a team. This in effect means that we do not pit them one against another. Rather we attempt to instil in them that the competition is outside the firm, which actually is where it is.

The net result of the above is that there is little intrigue at the point of salary and general compensation disclosures. Staff accept that the way it is, is the way it is. If they do not like it they can leave which sometimes happens within a year of joining.

And here’s Horowitz:

A CEO creates politics by encouraging and sometimes incenting political behavior—often accidentally. For a very simple example, let’s consider executive compensation. As CEO, senior employees will come to you from time to time and ask for an increase in compensation. They may suggest that you are paying them far less than their current market value. They may even have a competitive offer in hand. Faced with this confrontation, if the request is reasonable, you might investigate the situation. You might even give the employee a raise. This may sound innocent, but you have just created a strong incentive for political behavior.

This kind of thinking runs counter to what one finds at Goldman Sachs, where there’s a real emphasis on rewarding — and punishing — individuals:

On Wall Street, becoming a partner at Goldman Sachs is considered the equivalent of winning the lottery.

This fall, in a secretive process, some 100 executives will be chosen to receive this golden ticket, bestowing rich pay packages and an inside track to the top jobs at the company.

What few outside Goldman know is that this ticket can also be taken away.

As many as 60 Goldman executives could be stripped of their partnerships this year to make way for new blood, people with firsthand knowledge of the process say. Inside the firm, the process is known as “de-partnering.”

The two philosophies are not completely incompatible. Great team members can and should be rewarded with raises and promotions, even when such things aren’t the result of negotiations, and Goldman partners don’t negotiate their position in any real sense: they’re quietly vetted, and then called in to the CEO’s office to be told the good news. What’s more, Goldman does try to reward people who build great teams and who work for the greater glory of the franchise instead of trying to burnish their personal credentials.

But all the same, Goldman is a company of 35,000 employees with just 375 partners — and Goldman president Jon Winkelried once said that making partner was viewed as the real beginning of a career at the firm. Given that one in four of Goldman’s existing partners faces the humiliation of de-partnering next month, it’s reasonable to assume that Goldman employees, both before and after they make partner, are competing against their colleagues just as much if not more than they’re competing against their actual competitors.

I do think it’s possible to create a bank built around teams which can last for years and which aren’t torn apart by an up-or-out culture. But such banks tend to be small, and it’s definitely seems as though it’s easier to build those structures if, like Olliff, you’re on the buy side rather than the sell side. Any idea as to why that should be the case?

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