We’re in the dark about Wall Street pay

January 19, 2012

Today is a very big day at Goldman Sachs.

It’s bonus season on Wall Street and Goldman’s employees are about to learn their “number,” the annual object of obsession that makes up the bonus portion of their compensation. Depending on the number of zeros attached to that number, Wall Streeters will rejoice, buy big homes or quit in a huff.

In turn, many of us will be instantly disgusted by Wall Street’s pay.

There’s a problem, though, with anger about Wall Streeters’ paychecks: we know almost nothing useful about the way the industry rewards its employees. We know that Wall Street pay is high, and certainly far higher than the median American income, which is a serious problem. A battery of studies have linked Wall Street’s pay practices to skewed incentives, outsized risks and short-termism.

Beyond that, though, talking about Wall Street pay becomes an exercise in gossip.

Here’s a sample of recent reports: Bloomberg, relying on bank sources and pay experts, reports junior bankers won’t see annual guaranteed salary increases this year. The NYT reports executive compensation experts charge $11,000 for an annual report which helps banks determine how much to pay top traders. Andrew Ross Sorkin posited that pay on the Street will actually be higher this year if you compare it to revenue.

But, by far, the most common figure you’ll hear during bonus season is average pay per employee. The WSJ declares: “Average pay at Goldman Sachs: $367,057”. It’s a figure that nearly every news organization bandies about, often without caveats.

Unfortunately, using averages to describe Wall Street pay is a bit like writing about baseball salaries if you included A-Rod in the same data set as peanut vendors. Average Wall Street bonus figures come from compensation set-asides that include support staff and IT workers along with, as the Epicurean Dealmaker points out, workers who generate real revenue.

Then there are the outliers at big banks, whom we know nothing about. Goldman Sachs is about to lose two of the four heads of its largest division, but you’d be hard-pressed to find detailed information on their compensation. Most banks, unfortunately, don’t give headcounts for their various divisions, so getting a sense of pay-per-person in specific bank divisions is usually impossible.

Remember Andrew Hall, the former Citigroup trader whose Phibro unit pulled in 10 percent of the bank’s net income in 2007? (Hall, famously, demanded a $100 million payday in the middle of the financial crisis). You won’t find full information on Hall’s pay in Citi’s U.S. SEC disclosures, even though he was known to out-earn some of the bank’s top executives, including Citi’s CEO; his compensation was first sussed out by the Wall Street Journal.

There’s vital information in these pay practices: We didn’t learn that Joseph Cassano’s pay from AIG peaked at $44 million until the Financial Crisis Inquiry Commission released its findings, some two years after his unit nearly took down the economy.

And we also don’t know how much of Wall Street’s pay is relatively unobjectionable. Investment banking can be, as the Epicurean Dealmaker suggests, about moving relatively safe products that people want:

Business like M&A, where you earn a fee for helping a client buy or sell a company, or security underwriting, where you earn a fee for placing client securities with outside investors, or securities market making, where you earn a spread for standing between buy- and sell-side investors as a middleman and temporary warehouser. None of these businesses entailed any material amount of persistent or hidden financial risk to investment banks: we did the deal, we got paid, and we moved on. There are no meaningful, dangerous “tail” exposures from such activities.

In any given year, we have no real idea how much Wall Street pays for its more socially redeeming functions, compared to how much it pays the Joseph Cassanos of the world.

Even a simple tally of the number of six, seven or eight-figure earners in any big bank, broken down by division, would give us a clearer picture of compensation. And it would be great if banks were forced to reveal how much they paid their highest earners every year, and what divisions those earners worked in. Shareholders and regulators might then form useful observations about risk, talent and reward.

But for now, all we can do is guess about what Wall Street banks really value.

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6 comments so far

And after Joseph Cassano ran AIG into the ground, the federal government hired him back as a contractor at the rate of $10,000 per month (!) to assist AIG’s new management in unwinding his credit default swap and other derivative trades.

Posted by Strych09 | Report as abusive

You’re missing forest for trees. One of the problems is excessive pay for looting (and subsidized banking); the other is that bonus structure by itself creates problems, via bad incentives. Third, the notion that people would need to be rewarded with bonuses varying between hundreds of thousands to millions of dollars a year for wealth extraction and trade skimming via those supercomputers (oh, pardon me, “performing useful functions”) is ridiculous. Ever read Mark Ames’s Going Postal?

Posted by Foppe | Report as abusive

Here in New Zealand company annual reports detail the number of employees under each income earning bracket ($50,000 – $100,000, $100,001 – $150,000 etc). Are companies over there not required to report on this?

Posted by Mike.Gayner | Report as abusive

I think that the problem isn’t just the size of these people’s pay, it’s also the fact that they are getting paid so much for performing work that is perceived to have no public value.

Retail banking, M & A, market making, asset management…these are all activities that are useful and necessary in a market-based economy.

Trading for one’s own account, however, provides no value whatsoever to anyone other than shareholders, which is why many people, myself included, think that it should be split off from other banking functions, much like it was under Glass-Steagel.

Posted by mfw13 | Report as abusive

Foppe, take the example of the UK. The issue there was not investment banking rather boring commercial banking. Fred Goodwin didn’t buy ABN at the top of the market to get a bigger cash bonus rather he did it to enhance the value of his shares – aka long term incentives. As usual with your claims the very opposite is true.

mfw13, ask Time Warner how productive M&A is. Ask the underwriters of BP in 1987 how little hidden risk there is in equity underwriting. Asset Managers were the people who DROVE the growth in Asset backed securities, driven by their clients – ie you – to get the maximum amount of short-term gain for the minimum amount of risk – as defined by the regulator – they are the reason ALL of the subprime happened. How do you market make without some trading for your own account? Also Glass Steagall separated commercial banking – the people who lend money to dodgy third world countries, make LBO loans, S&Ls, make dodgy suprime loans and at best rip off customers – from the securities business such as M&A, underwriting and

Prop trading at investment banks had absolutely nothing to do with the last crisis. All of it was the “low risk” stuff mentioned here.

Posted by Danny_Black | Report as abusive

Strych09, do you have a reference for the $10,000pm? Thanks

Posted by DrRajT | Report as abusive
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