Should Wall Street be embarrassed about its record pay?
Filed under: Economy, Investing, Earnings
President Obama thinks Wall Street should be embarrassed to pay itself multi-million dollar bonuses. But embarrassment is not in Wall Street's emotional lexicon -- except for the embarrassment of getting paid a smaller bonus than the person sitting at the next desk. And it's that kind of embarrassment that is driving Morgan Stanley (MS) to pay out 72 percent of its revenue in cash compensation.
While we're at it, the SEC should be embarrassed to allow Wall Street banks to sell their stock to the public. That's because those banks are so clearly run for the benefit of their employees rather than for public shareholders. Morgan Stanley lost $1.3 billion in the second quarter -- since it did not make a profit, it makes no sense to me to pay bonuses. Meanwhile, Goldman Sachs Group (GS) is on track to pay itself almost $773,000 in bonuses per employee -- it made $3.4 billion in profits in the second quarter -- but those came mostly from taking big trading risks.
So why is Morgan Stanley paying out so much of its revenues in bonuses? It is afraid of losing people to Goldman. How so? Morgan Stanley's 72 percent of revenues -- a mere $92,009 per employee in the first half -- is a fraction of Goldman's $386,429 per employee.
And therein lies a threat to the rest of the industry: All Wall Street employees who generate significant revenue for their firms will have no choice but to jump ship from wherever they work and go to Goldman. The reason is simple. On Wall Street it is embarrassing to get paid less than the fellow at the next desk. If you could be getting paid three times more at Goldman than you are at Morgan Stanley, you must go to Goldman if Goldman will have you.
The U.S. should be embarrassed that it is allowing the top six Wall Street banks to pay themselves $74 billion -- up from $60 billion in the corresponding period in 2008. Many of these banks have repaid the TARP money but they are still getting tens of billions of dollars worth of very low interest rate loans from the Fed, the Treasury, and the FDIC to finance their trading. In short, taxpayers who have put $23.7 trillion at risk to bail out Wall Street are subsidizing its record bonuses.
And Goldman -- which is paying out the biggest bonuses -- is taking the most risk. Which means that it is likely engaging in the same short-term risky behavior that got the financial system into trouble in the first place. But therein lies another problem -- reading Goldman's financial statements provides no insight into exactly how Goldman makes its money.
When it comes to Wall Street pay, there is plenty of embarrassment to go around -- but not the kind that for which President Obama yearns.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 1)
7-23-2009 @ 11:38AM
bailoutsos said...
Why should they care about paying high salaries, when they have the government ready to jump to bail them out?
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7-23-2009 @ 12:01PM
BHarrison said...
Our capitalistic system that built the wealth and prosperity of our nation is been perverted by the financial institutions and our government (sic. Congressmen) to allow the financial instituions to pillage our national economy via the orchestration and perpetuations of massive frauds and pyramid schemes during the last decade or more. The vast majority of these financial crimes would have been totally avoided and/or prevented if Congress had exercises reasonable and prudent regulation and oversight of the financial insdustry; but the vast majority of Congressmen chose to serve the corrupt interests of the financial institutions and the ultrawealthy individuals.
It is totally unconscionable that these corporate "participants" and our corrupt Congressmen be allowed to continue in their postions to continue this corruption. The American people must rise up politically to demand the removal of those corporate management and Congressmen who orchestrated, or allowed the orchestration of these frauds.
The propaganda that the bailout efforts were to save peoples' mortages from foreclosure has been revealed to be the scam that it is. Originally, only 1% of the mortgages nationally were being projected to be in danger of foreclosure actions; now the value of those mortgages is barely a fraction of the bailout monies that have been appropriated; and yet the foreclosure rates are escalating.
All of the government's actions have been a propaganda scam to save the wealthy financial institutions from the losses arising from the frauds and pyramid schemes that they orchestrated and which caused the economic collapse of our national economy.
Why haven't these corporate CEOs and upper managment personnel been indicted for the crimes that they committed. Why should the other employees, who benefitted richly from the frauds and pyramid schemes, be given pay raises and/or bonuses while the American people are suffering from the financial fall out from these crimes . . . this is tantamount to "rewarding the theives and crooks".
Wake up America, it is time to throw the Crooked Congressmenout of office and to demand the indictment of corrupt corporate personnel; and an accounting and prosecution for the financial crimes that caused this financial crisis.
Every American should contact their Congressmen . . . hell no, we aren't going to take this lying down.
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7-23-2009 @ 3:05PM
Mike McKibben said...
All I can say about your post is, I'll second that! Good post.
7-23-2009 @ 5:33PM
ME said...
"the banks argue that they have to pay "competitively" in order to retain top employees." What's the competition, to see who can pay the most to these greedy dimwits?
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7-23-2009 @ 12:58PM
watching closer said...
...and they say changing the healthcare system can't be done. The top has climbed so high that they can't see beyond their noses. It really smells up there.
Americans are used to getting ripped off, heck, they'll pay top dollar to sit in a theatre to watch a movie about it.
To the top twenty or so percent of americans that are draining the wealth from the economy, the plumber is coming. Good luck on judgement day.
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7-23-2009 @ 7:25PM
Nick said...
It is a culture of greed and entitlement. The markets can be manipulated by large firms so why not just join the swindle. I wish I could get government aid for my teams bad decisions and give all the causes for the problem a raise the next year. The problem is just like in D.C.; it is other peoples moiney so who cares.
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7-23-2009 @ 1:32PM
Judy Kertes said...
The rich and greedy will always get bonuses. It doesn't matter, republican or democrat. We need another party in this country that pays people who earn their money. This two party system is not much better than dictatorships! We really have no choice!
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7-23-2009 @ 3:27PM
Andy said...
Fraudulent crooks that should be in jail. Making billions on money stolen from tax payers.
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7-23-2009 @ 4:15PM
Ev said...
Obama does not do anything. He is an embarrasement.
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7-23-2009 @ 4:41PM
ibeamerican said...
If they want to pay big salaries and bonuses, fine. But no taxpayer money, not one cent, should go to them, even if on their "deathbed". We as Americans and consumers need to divert as much money as we can away from these crooks. Let capitalism thrive. It would be difficult, but if each one of us made an effort not to do business with these abusers then no revenue would equal no bonus, no salary, and we can wave at them in the unemployment line, or shovel the remains up after they jump out the window (the preferred method).
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7-23-2009 @ 5:22PM
dxxy4u said...
Wall Street is not about helping people, it's about help it's Investors. Always have, and alway will. So stop looking to Wall Street to help out the Economy. The "Street" is like a flea on a dead dog, it jumps off and look for another breathing being.
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7-23-2009 @ 6:26PM
Elizabeth said...
Did you know the bible says be warned of being too wealthy lest you get robbed? I guess, God is saying share or else. Ha! I don't envy the wealthy, cause they will be taking the consequences. Sad, though.
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7-23-2009 @ 9:27PM
Bill said...
It's fairly simple--bonuses should be paid out of profits not out of financing. If there are no profits, there are no bonuses. If one department is profitable but another is not that's too bad but the whole company needs to be above water before bonuses get paid. Simplify the thinking down to one household where one spouse has a good year and the other has a bad one. They've got to pay their bills before they think of buying the new car. If there is a loss, the top people who enjoy the bonuses most should absorb the losses most, not the hourly folks. And you always pay your creditors who rendered you services or provided goods.
It's time to return society to a system where there is accountability in every sector, from the individual, to the business, to the non-profit, to the government. Start by looking the mirror and then teach your children to be accountable for their actions.
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