By Jared Dillian | Bloomberg,
Wall Street banker bonuses are supposed to be kept secret for a variety of reasons. If everyone knew who was paid what, there would be an uprising as people discovered that clear underperformers were getting compensated more than them. It happens. Wall Street compensation is not always about performance. As I outlined in a column earlier this year, it’s largely driven by office politics. I didn’t tell anyone what I received when I worked at Lehman Brothers Holdings Inc. outside of my partner on the exchange-traded fund trading desk.
Information about very large bonuses became public in Lehman’s bankruptcy filing, which had a list of the highest-paid employees in the firm. My boss’s boss made $8 million a year, and his boss made $25 million. A handful of people were making from $60 million to $80 million. The response within the firm was: so that’s where the money went. I was making $850,000, which is nothing to complain about, but I felt I probably deserved an extra couple hundred thousand. Bonuses, though, are a zero-sum game. A certain percentage of profits is allocated to compensation, and if one person gets more, someone else gets less. That’s just how it works.
This may seem like an odd time to be talking about Wall Street compensation, as it isn’t bonus season, but banker compensation is in the news. Cantor Fitzgerald Chief Executive Officer Howard Lutnick is currently at the center of a lawsuit alleging that his $50 million compensation package constituted “excessive pay” relative to the value he added to the firm’s commercial real estate unit. And Johnson Associates Inc. just released a widely-followed report predicting that bonuses for those underwriting debt and equity could tumble more than 45% this year, while those advising on mergers and acquisitions could see a drop of 25%.
Huge divisions in pay within a bank is an underappreciated risk. Those employees, especially at the lower end, who feel they aren’t being fairly compensated may also feel as if they don’t have any “skin in the game.” They may not work as hard to drum up revenue, or they may be willfully indifferent or oblivious to capital market risks. There is also the phenomenon where older, more experienced, highly paid employees are eliminated and replaced with junior employees. Ben Ashby, a former managing director at JPMorgan Chase & Co.’s Chief Investment Office & Treasury, wrote a column for Bloomberg Opinion in 2021 about this “juniorization” of Wall Street, and how 40% of the senior risk managers had been let go at Credit Suisse leading up to the Archegos Capital Management debacle.
Experience is very important on Wall Street, especially in trading and risk management. Keep in mind that someone 36 years old working on Wall Street today did not experience the financial crisis in his or her professional life. They’ve only worked in a market and economy supported by zero interest rates and extraordinarily loose monetary and fiscal policy. The problem with senior risk-takers and risk managers is that they are expensive. You don’t see many people working on Wall Street in their 50s; they get pushed out in their 40s.
You can go around in circles on what constitutes “excessive” compensation, but being a CEO is a hard job. Howard Lutnick has kept Cantor Fitzgerald relevant more than 20 years after Sept 11 terrorist attacks that wiped out most of the firm. And though Wall Street compensation has always been top-heavy, it has gotten even more so in recent years. That’s partly because of the focus on pay at financial institutions deemed “too big to fail” in the wake of the financial crisis. The result was an effort to tie compensation directly to revenue, and some employees at the top produce a lopsided amount of revenue. Where being a mid-level employee on Wall Street used to ensure an extremely comfortable living — and that’s an understatement — such is not always the case these days as top producers suck up all the compensation. (To be sure, no one working at a big bank is having a hard time making ends meet.)
This expanding division in pay is a risk for banks, as employees who feel they aren’t being fairly compensated will have an outsized incentive to leave. Several people that I used to work with at Lehman have told me over the years that there was some ill will after I left the firm to start a newsletter because as head of the ETF desk I was a key player and my absence left a hole. My response has always been that the firm should have paid me more! If I was paid $1.5 million instead of $850,000, it would have made the decision to leave much more difficult. Traders and salespeople are talented, and the optimal amount to pay them is the minimum amount that keeps them from leaving. In my case, the firm miscalculated. Maybe I would still be trading ETFs if it didn’t.
As for Lutnick, you could look at his compensation as a reward for an accumulation of his contributions over time. Then again, Lutnick isn’t making a whole lot less than JPMorgan CEO Jamie Dimon, who was paid $84.4 million last year running a much larger and more complex financial institution. I can’t say whether Lutnick deserves the money, but every employee at a bank has an important role to pay, and if their contributions are not recognized, divisions can emerge and mistakes can happen.
More From Other Writers at Bloomberg Opinion:
• Junior Bankers Deserve Their Bonuses. Really: Jared Dillian
• KKR Wins by Treating Workers More Like Owners: Brooke Sutherland
• Blythe Masters Wants to Help You Cash Out Early: Chris Bryant
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Jared Dillian is the editor and publisher of the Daily Dirtnap. An investment strategist at Mauldin Economics, he is author of “All the Evil of This World.” He may have a stake in the areas he writes about.
More stories like this are available on bloomberg.com/opinion
©2022 Bloomberg L.P.
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