Wall Street pay rises 17%

As financial firms rebounded from the abyss, they paid their staff a total of $20.3 billion in bonuses over the course of 2009. This is a 17% increase from 2008. The information was made public by the New York State comptroller in a report.

 

In 2008, a total of $17.4 billion was paid in bonuses despite the industry suffering a $42.6 billion loss which saw a $180 billion bailout for AIG (AIG), the bankruptcy of Lehman Brothers and the sale of Merrill Lynch (to Bank of America - BAC) and Bear Stears (to JP Morgan - JPM).

 

During the days of easy money and easy credit circa 2007, Wall Street employees took home a mammoth $32.9 billion. At current market capitalizations, that’s enough to buy AIG 9 times over and almost enough to buy American Express.

 

According the same report, compensation at Goldman Sachs (GS), Morgan Stanley (MS), and JPMorgan (JPM), which are more diversified than traditional broker-dealers, increased by 31 percent in 2009. The average compensation per employee at those three firms rose by 27 percent to more than $340,000. That’s about 6.7 times the median household income in the United States, and that’s just in bonuses.

 

In a largely futile public relations and exercise in hubris, most of the largest financial firms have reported that their top executives will not receive any cash bonuses in 2009. Rather, they will receive the same value of compensation but in the form of stock options and other forms of deferred compensation. It could be argued that such forms of compensation actually reward executives with higher pay over the long-term than they would otherwise get from immediate cash bonuses. So instead of getting “no bonus”, most executives are getting an even larger piece of the pie in the form of equity in their businesses. From the low base these options were granted the executives are set to obtain massive windfalls once these companies recover and operate with some normalcy in a less competitive environment.

 

Lloyd Blankfein, CEO of Goldman Sachs, was paid a $9 million bonus in the form of stock options in 2009. This appears to pale in comparison on a relative basis to rival Jamie Dimon, at JP Morgan, who was paid $17 million in stock. Blankfein should be okay though; he was paid $68 million in 2007.

 

The industry devoted a much lower share of net revenue to compensation in 2009 compared with the period before the financial crisis. Historically, industry compensation (salaries and bonuses) has averaged about half of net revenue, but compensation declined to about 40 percent of net revenue in 2009. Plainy speaking, of every $1 in sales these firms make, 40 cents goes to compensation and 60 cents goes to operating and expanding the business, paying creditors and finally, to stockholders. No other industry in the world operates on this basis.

 

Another interesting and potentially socially unstable situation sees Wall Street accounting for 24 percent of the wages paid to workers in New York City in 2008, even though it accounted for only 5 percent of the jobs. The average taxable bonus rose to $123,850 per worker, overall. That’s almost enough to buy two brand new Range Rovers. As pointed out previously, average compensation rose even faster because firms reportedly paid a larger share of bonuses in the form of deferred compensation than in the past. In lieu of cash paid out immediately, Wall Street employees are gaining a windfall over the long-term.