Opinion

Felix Salmon

Remuneration datapoint of the day, Pimco edition

By Felix Salmon
February 13, 2012

Jenn Ablan and Matt Goldstein report on the mind-boggling amounts of money being made at Pimco (Note, as per the update below, that Pimco says that the numbers here are “wildly inaccurate”):

The aggressive culture has minted millionaire traders and portfolio managers. The top 30 partners have pulled down an average $33 million a year in compensation in recent years, say people familiar with the firm.

Never mind the $2.2 billion net worth of Bill Gross, the founder of the company; nowadays, people like Neel Kashkari can come in and immediately start making millions of dollars a month. Kashkari, remember, is still in his 30s: had he stayed at Goldman Sachs, he’d be doing fine for himself but making nothing remotely approaching this kind of money. Taking a pay cut to follow Hank Paulson to Treasury turns out to have been arguably the most lucrative decision of his life.

Indeed, it might be true to say that no one on the sell side of Wall Street — no one who works for a bank — is making the kind of money that the average Pimco partner is pulling down. There are 53 of them altogether — they’re called managing directors, now — and the amount of wealth they’re accumulating is simply astonishing. It also helps explain why so many long-time Pimco fund managers leave to set up their own companies: they’ve already become dynastically wealthy, and they have more than enough capital to found their own shop, where they can keep everything for themselves.

And when you get to Pimco’s size, the amount of money rolling in is so enormous that it’s easy to see how you can get to these kind of sums. Pimco has some $1.4 trillion in assets under management, and won’t tell anybody how much it charges to manage that money. If a big sovereign wealth fund is handing over tens of billions of dollars to manage, you can be sure they’re driving a hard bargain in terms of fees. On the other hand, look at the public fees for Pimco’s flagship Total Return Fund: the total expense ratio ranges from 0.9% to 1.65%, with customers having to pay an up-front 3.75% sales load to get that lowest fee.

And we know that in 2010, New York City paid Pimco $15.3 million in fees on an investment of $220 million, split between a $1.3 million management fee and a $14 million incentive fee. That’s a total fee of 7% of assets.

Pimco’s been expanding quite aggressively into areas like hedge funds and equities where it gets to charge much more than the fees it normally charges for its bond funds. But let’s be conservative, and say that overall it pulls in 1% of assets every year. That would give Pimco annual revenues of $14 billion. (As per Update 2 below, this number doesn’t square with Allianz’s asset-management revenues.) Let’s say that 60% of that goes to Pimco’s owner, Allianz, as profits on its investment. That leaves $5.6 billion to pay for overhead and salaries.

Pimco’s small, in terms of employees: it has maybe 2,000 altogether. Let’s say that it costs an average of $100,000 per employee to give them nice offices and benefits and the like. And let’s say they all get $100,000 a year just for being Pimco employees. Then that’s $400 million a year to cover overhead and support staff. That still leaves $5.2 billion or so to pay the 750-odd investment professionals in the firm — which works out to an average of roughly $7 million each.

Or, to put it another way, if you’re an investment professional at Pimco and you’re not making seven figures after tax, you’re probably way down the totem pole.

We know one datapoint for sure, thanks to documents that Pimco had to file at Companies House in London: the firm’s highest-paid director in the UK — almost certainly Joseph McDevitt — got paid £25.6 million in 2010. That’s $40 million.

All of which means that if you’re upset about the monster pay packages at the big banks, you’re looking in the wrong place: the buy-side is paying the kind of salaries the sell-side can barely even dream of.

As for the amount that Pimco’s paying Alan Greenspan to be an adviser to the firm, or the amount that CEO Mohamed El-Erian is pulling down, I hazard to even guess. But I suspect he earned more today than I’m going to make all year.

Update: A Pimco spokesman emails:

“The numbers cited in your blog post today are wildly inaccurate.”

Update 2: In the wake of the Pimco statement and other feedback, I’m taking a second look at the numbers. Specifically, Allianz said in its 2010 annual report that total 2010 revenues in its asset-management arm — which includes Pimco — were €4.986 billion, or about $6.6 billion. They probably went up in 2011, but that also includes various non-Pimco asset managers, so it’s probably reasonable to consider $6 billion an upper bound for Pimco’s revenues.

The two numbers we can be pretty sure of, in this post, are the $1.4 trillion in total AUM, and the $40 million paid to one London-based partner in 2010. (Who may or may not be Joseph McDevitt.) Everything else is speculative, and some of it is surely wrong, although Jenn stands by her reporting.

Comments
28 comments so far | RSS Comments RSS

“But I suspect he earned more today than I’m going to make all year.”

‘Bout time you did a bit of work then, innit guv?

Posted by ottorock | Report as abusive
 

“All of which means that if you’re upset about the monster pay packages at the big banks, you’re looking in the wrong place”

Not really. I’m perfectly fine with people in finance making obscene amounts of money as long they’re doing so fair and square. You’ve always been able to make more money as a principal investor rather than through advisory work.

It’s when banks make money by taking risks with taxpayer funds (i.e. privatizing gains and socializing losses) that I get upset as a citizen. And it’s when they reward employees for illusory short-term trading profits that I get upset as a shareholder.

Posted by loudnotes | Report as abusive
 

Returns to scale can be pretty impressive, can’t they?

Posted by EpicureanDeal | Report as abusive
 

“It’s when banks make money by taking risks with taxpayer funds (i.e. privatizing gains and socializing losses) that I get upset as a citizen. And it’s when they reward employees for illusory short-term trading profits that I get upset as a shareholder.”

PIMCO’s also taking risk (of a sort) with taxpayer funds. Their biggest investors are pension funds and insurance companies. For insurance companies, the insurance company manages assets to pay out claims, until their equity goes to zero. At which point the government has to pay out the claims.

Pension funds also fall into three camps:

1. Pensions of private corporations.
2. Union pensions.
3. Public pensions.

In the third case, PIMCO is directly betting with taxpayer money, assuming that taxpayers make good on promises to public employees. In the first two cases, the government also backstops the pension fund through the PBGC. Even the first losses on the first two have large principal-agent problems. Corporations are supposedly held accountable to shareholders and union pensions held accountable to members. But in practice, the boards and trustees are those who make the decision to invest in PIMCO.

For the boards that manage these investments, their interests may not strongly align with the interests of the real end stakeholders, shareholders, union members and taxpayers. They may be hired or fired based on how they do relative to the market, and they may get incentive bonuses for large gains. In other words, the investment boards have call options on the underlying assets.

The moral hazard theory usually goes that the agent will want to maximize volatility when losses are socialized, but they actually want to maximize negative skewness, i.e. picking up pennies in front of a bulldozer. If the agent loses their job with either a 10% decline or 100% decline, then their incentive is to push the distribution of big losses as close to 100% as possible while pushing the rest of the distribution slightly higher. (This is all ripped off of Macro Resilience btw, an excellent blog).

So, as far as PIMCO and moral hazard in general, we need to think in terms other than whether losses are socialized or not. Enron and Madoff technically didn’t socialize any losses, but they still created a lot of losses for people who happened to be in the wrong investment at the wrong time. That’s pretty much a loss on taxpayers, just with a few taxpayers paying a lot than a lot of taxpayers paying a little.

The real issue is the principal-agent problem throughout the financial system. Fees of 7% of assets for NYC are absolutely incredible and it’s hard to believe that PIMCO really created that much value for NYC. If PIMCO instead created those returns through creating negative skewness assets, such as using derivatives, then NYC’s funds could do very, very badly in the long-term.

Posted by mwwaters | Report as abusive
 

No question being an investment professional at a successful firm that has kept headcount under control can be incredibly lucrative – but you should really look at the Allianz annual report to sanity check your numbers. Total net revenues for their AM business was a smidge under 5 billion. I’m under the impression that PIMCO is fully consolidated in those numbers. Looks like Allianz doesn’t give them the standard 50% of revenue payout. You could probably guess that Pimco is putting half of its costs (3bil EUR for the entire Allianz AM biz – which is granted mostly Pimco) towards comp – so maybe 1bil to 1.5 bil?

I mean your point stands, its a great place to work. But your math seems a little crazy.

Posted by topofeatureAM | Report as abusive
 

“sell side” and “buy side” are misleading. $14 billion annual revenues means that PIMCO is selling big-time. In the past, i-banks might have sold primary market securities to institutions, now they sell to PIMCO and PIMCO sells to the institutions.

Posted by revelo | Report as abusive
 

The $33 million salary is grossly overstated. Being from the Newport beach area, Pimco is notoriously rumored to underpay talent at all levels.

Posted by forteology | Report as abusive
 

Yet what is PMICO doing that is a net positive for society?

Posted by mfw13 | Report as abusive
 

the update email from pimco is hilarious, do they even have a number to justify?

http://www.cnhedge.com

Posted by cnhedge | Report as abusive
 

revelo, it is simply terminology. Nothing to do with buying or selling.

loudnotes, so making bets with other people’s money doesn’t bother you. Also, again, what losses did the banks socialise in the US? The financial companies that required and still require massive public money were Frannie who were buyside, albeit unique ones.

mwwaters, I highly doubt that many investment professionals even consider some of the “tail” risks they are taking. The whole point is that they are not obvious to most people and as we saw in the last crisis, those who are aware of it have to go through hell for a couple of years waiting for the blowup – and are usually villified after.

Posted by Danny_Black | Report as abusive
 

Open-Book Management can provide practical ways to meet fairness aspirations… in light of corporate sustainability, employee satisfaction, engagement, retention + fairness. IEDP digest the new white paper from UNC Kenan-Flagler here – http://www.iedp.com/Blog/Open-Books_Fair ness-Fair-Pay

“Open-Book Management for fair remuneration, a fair return for shareholders and fairness through transparency…”

Posted by Daniel_Anders | Report as abusive
 

how much of that AUM is public pension money?

Posted by beardown | Report as abusive
 

Has anyone noticed that Pimco has a regular slot on Bloomberg TV?

There is always someone from PIMCO appearing daily. If there is an arrangement between PIMCO and Bloomberg it ought to be made public.

Posted by RS108 | Report as abusive
 

Until recently, their performance was great and the fees were low. (Size should hurt the former, but helps the latter.)

If outperforming in the toughest, most liquid markets for an extended period and building a $1.4 trillion fund doesn’t make someone a fortune, then what should?

Do you think Bill Gross and other top partners could leave and start a hedge fund and make more than $30m with similar success?

Posted by Curmudgeonly | Report as abusive
 

“But let’s be conservative, and say that overall it pulls in 1% of assets every year.”

Felix, you consider this “conservative”? For managing bonds?!?

I’m skeptical if any manager in any asset class truly adds that kind of value. (You can certainly boost returns by that much, but it typically also involves leverage and greater risk.)

Posted by TFF | Report as abusive
 

1% on 1.4 trillion is $14 billion, PIMCO’s fees are less than half that.

Posted by Curmudgeonly | Report as abusive
 

@Danny_Black: “Also, again, what losses did the banks socialise in the US?”

Wow. There are banking apologists, and then there’s Danny Black (who clearly knows the nuts and bolts of financial intermediation, but can’t see past the tree in front of him to realize the forest is burning).

Note to self: banks are to be held blameless at all times.

Posted by SteveHamlin | Report as abusive
 

steve, is that a long winded way of saying i cant think of losses the taxpayer bore instead of bank shareholders?

Posted by Danny_Black | Report as abusive
 

mwwaters, excellent discussion of the principal agent problems in investment management. Yes, the government backstop does protect against some of the downside, which conceivably distorts incentives for pension funds. That certainly could lead to funds doing a lax job performing diligence on potential investment managers.

However, the managers themselves (such as PIMCO) have no such backstop. While a portion of their client base may have a government guarantee, their incentives seem properly aligned with their clients, who are ultimately the beneficiaries of the pension funds. If PIMCO takes excessive risks and blows up, PBGC might make some of the clients whole, but PIMCO itself and a lot of its principals’ capital would be lost.

Danny, making bets with other people’s money is fine when you’re doing so a) alongside your own money and b) at their request.

Posted by loudnotes | Report as abusive
 

loudnotes, u mean like fuld at leh did? or cayne at bsc?

Posted by Danny_Black | Report as abusive
 

@Danny_Black: “What losses did the banks socialize in the U.S.?” Really? You’re being obtuse on purpose.

I’m assuming for this post that you agree that most large banks would not have survived 2008-2009 absent massive governmental intervention.

That assistance was directly to the benefit of bank shareholders and bondholders.

That assistance had, and is having, a cost: overpaying for bank assets by Treasury (subsidy/bailout – CBO estimates $65bn), risk borne by the government for free (Citi guarantee, JPM BS acquisition backstop guarantee, less-than-market haircuts on repo funding), a large chuck of Frannie’s losses are an ongoing bailout of mortgage originators/big banks. Ongoing financial repression, necessary intervention causing market distortions, abuse of the rule of law, a still-fragile financial system, and diminished trust in financial institutions – those are all real costs borne by the American public.

Most of the current enterprise value of large bank holding companies rightfully belongs to the taxpayer that rescued those entities from implosion. That the bailout cost was not booked on a GAAP basis, or that the administration has cooperated with this ongoing bailout, does not make it less costly to society, or less egregious.

Posted by SteveHamlin | Report as abusive
 

@SteveHamlin,

There are approximatly 7500 banks in the U.S. Fannie and Freddie are not among them. TARP was ballpark 700 billion. Most has been paid back with interest. Most of the rest will be paid back with interest. Their will be several billion that will not be paid back… but the interest on what did get paid back will more than cover the losses. By any reasonable measure the federal goverment will have made money on the financial bailout. Auto bailout didn’t go quite as well financially but hey Clint Eastwood and Detroit both seem apprecitive.

All banks good and bad large and small depend on the goverment during times of crisis. If you want to limit the risks they can take then it makes sence. As a banker I’m greatful for the goverment support… but so far that support hasen’t cost the taxpayers a dime that I can see.

Posted by y2kurtus | Report as abusive
 

Steve, not sure where u got 65bn but according to the latest cbo estimate, the tarp assistance to banks comes to a cost of 1bn, or put another way around the amount Jimmy cayne lost:

http://www.cbo.gov/ftpdocs/126xx/doc1261 1/12-16-TARP_report.pdf

For the purchase of troubled assets, it either cost nothing or made the taxpayer 2bn. I assume the amount u got was for the whole of tarp including the 44bn planned giveaway to homeowners. Difference between the lowest rate for **collateralised**loans to banks frim the fed vs unsecured libor highest rate, assuming the maximum amount borrowed was constant fir the whole crisis was 400mn, or less than what dick fuld lost.

Frannie is where most of the taxpayer money has been used to socialise losses but then frannie were DESIGNED that way.

As for the other “costs” you are claiming, i assume u are planning to net them from the equallt vague gains in the bubble era

Posted by Danny_Black | Report as abusive
 

Thanks for the comments loudnotes. My argument does assume that agents are completely rational and they cynically extract the maximum utility from principals under whatever incentive structure the principals give the agents.

The reality is a lot more complex. The partners of LTCM, Bear Stearns and Lehman all had much of their personal wealth in the equity of their companies. The LTCM partners even levered their personal investment to the point where many would have gone personally bankrupt if they weren’t bailed out.

In these cases, partners still tend to use their money to negatively skewed payoffs. They just don’t really know that they’re investing in negatively skewed payoffs. If there’s a long enough era of stability, then investors might stop considering certain possibilities and unknowingly attach themselves to negative skewness.

Furthermore, the agents who are true believers will win out against the completely cynical agents for capital. Outright deception is very tough. Goldman Sachs and other sell-side bond salesmen may not have an issue, but they sold their bonds to the true believers on the buy-side. The true believers were then the ones who really got capital from normal investors.

Also as Macro Resilience discusses, Principal-Agent problems didn’t just exist between investors and executives at money management firms. They also existed between executives and the middle-layers where the nitty-gritty trading decisions were made. As the e-mails that came out in the GS case and other cases showed, the traders could be far more cynical than those who faced investors. Traders (and risk managers) faced a choice between selling negatively skewed trading positions which could blow up or losing their job. These traders had far less of their personal wealth tied directly to their positions.

To get back to PIMCO and asset management fees, whether or not the agents are cynical or true believers doesn’t change the fact that agents can be compensated extremely well for negatively skewed bets. They may then lose that compensation if they personally invest in their positions, but nevertheless their compensation exceeds the value they create for society, which should be very worrying from a economic/regulatory perspective.

That’s also where moral hazard and government bailouts become worrisome. As TBTF banks and SIFI’s have more of an ironclad government guarantee, the financial system as a whole will maximize their returns by putting as much tail risk as possible on TBTF firms. We have no idea which asset will look fine until it crashes and burns, but we do know the TBTF structure creates an ideal scenario for negative skewness and that a large portion of the negative skewness will go to a handful of financial intermediaries up until the tail event happens.

Posted by mwwaters | Report as abusive
 

Danny_Black,

There’s another way to look at Cayne’s losses: the fact that he had a billion to lose in the first place. As I argue above, whether he believed in Bear Stearns and personally invested a billion dollars is almost beside the point. By any way you look at it, he earned far more than he contributed to society.

It appears the only reason he earned so much is that Bear Stearns could buy assets earning slightly more than LIBOR while borrowing the money at LIBOR or less. The yield difference wasn’t much, but since short-term Bear Stearns debt was considered risk-free and earned more than T-bills, Jimmy Cayne could siphon off a few basis points off an imaginary spread and get a billion dollars of net worth in the process.

If the repo and commercial paper markets where Bear borrowed at LIBOR were instead treated as what they were, banking demand deposits for the big players of the financial industry, Cayne wouldn’t have earned such a nice spread. He would have had less leverage and the assets would have been limited to relatively predictable, safe, boring assets like FDIC-insured commercial banks are limited to. The big financial industry players are theoretically consenting adults who don’t need FDIC insurance, but their end investors generally aren’t very sophisticated investors who can suffer just as much as a depositor in 1929 if the repo and commercial paper markets suddenly suffer a run.

Posted by mwwaters | Report as abusive
 

Mwwaters the claim commercial banks invest in safe boring assets would hold more water not for the fact they regularly fail. In the uk, it was “boring” lending that killed nrk, hbos, b&b. “boring” commercial real estate killed leh.

As for his contribution, pretty sure bsc paid more than a billion in taxes under his tenure which presumably goes to a “greater good”.

Posted by Danny_Black | Report as abusive
 

Mwwaters, you also miss the point that in a bubble people who do NOT take these crazy bets get killed. Phillip Purcell lost his job because he was trying to take MS out of the risky principal trading business. Perpetual Asset Management got taken over because it didn’t buy worthless internet stocks.

Posted by Danny_Black | Report as abusive
 

“Mwwaters the claim commercial banks invest in safe boring assets would hold more water not for the fact they regularly fail.”

Danny_Black, the **assets** are too safe and boring to be of interest to anybody. So the commercial banks buy them up by the trillions and leverage them 97-3.

Pretty much any investment becomes exciting when leveraged 97-3. Just ask homeowners who bought at that leverage ratio in the bubble.

Posted by TFF | Report as abusive
 

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