We’re in the dark about Wall Street pay
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.