Have Wall Street Bonuses Become Too Big To Fall?
For all the drama surrounding Wall Street bonuses in a year in which Wall Street profitability was cut in half to just $13.5 billion, the worst since the collapse and bailout of 2008 and 2009 (and compared to $27.6 billion in 2010 and $61.4 billion in 2009), one would think that the average banker would see zero bonus in 2011, or in some cases, especially if they worked at a Greek bank, be told to pay for the privilege of working. The truth is that according to official data from the NY City Comptroller, the average bonus dipped by just 13% in 2011, declining modestly from $138,940 to $121.150. In fact, while a number of large firms announced reductions in cash bonuses for 2011 (with several firms reporting reductions in the range of 20 to 30 percent), personal income tax collections indicate a smaller decline in the overall cash bonus pool. A big reason for this is deferred bonuses from prior years hitting this year's payroll and thus smoothing the impact. Still, bankers being forward looking people, are looking forward and probably not liking what they see. Yet while 2011 data for comprehensive pay is still not available, in 2010 the average salary rose by 16% to $361,180 as more firms shifted to a base-heavy comp structure. Indicatively, the average Wall Street salary is 5.5 times higher than the rest of the private sector at $66,100. And no matter how one feels about them, one thing is true: the New York economy would founder without taxes paid by bankers: "the securities industry in New York City accounted for 23.5 percent of all wages paid in the private sector despite accounting for only 5.3 percent of all private sector jobs" and more importantly, "each job created (or lost) in the securities industry leads to the creation (or loss) of almost two additional jobs in other industries in the City. OSC also estimates that each new Wall Street job creates one additional job elsewhere in New York State, mostly in the City’s suburbs." Hence - Wall Street's bonuses have become "Too Big Too Fall", as the entire economy of NY City and the state is now held captive by Wall Street's exorbitant bonuses.
Below is a chart of the average Wall Street salary since 1985:
That said, all of the above is mostly noise: the only thing driving banker pay is the amount of leverage in the system. As it surges, banker compensation is merely an "externality" of all the newly oozing cash as shown here.
Here is comptroller DiNapoli's remarks on the matter:
And some more observations:
“Cash bonuses were down in 2011, reflecting a difficult year on Wall Street,” DiNapoli said. “Profits were down sharply and securities firms in New York City resumed downsizing in the second half of the year. The securities industry, which is a critical component of the economies of New York City and New York State, faces continued challenges as it works through the fallout from the financial crisis and adjusts to regulatory reforms.”
The Comptroller also estimates that profits for the broker/dealer operations of New York Stock Exchange member firms, the traditional measure of profitability for the securities industry, did not exceed $13.5 billion in 2011, which would be less than half of the $27.6 billion earned in 2010. This would be the second year in a row that profits dropped by more than half.
While the industry had a strong first half with profits of $12.6 billion, it lost $3 billion during the third quarter. Underlying profitability at the large firms was even weaker than reported because profits were boosted by accounting adjustments. The industry earned a record $61.4 billion in 2009 with the benefit of federal assistance after losing a record total of $53.9 billion over the course of 2007 and 2008. While a number of large firms announced reductions in cash bonuses for 2011 (with several firms reporting reductions in the range of 20 to 30 percent), personal income tax collections indicate a smaller decline in the overall cash bonus pool. This is likely due to the payment of bonuses that had been deferred from earlier years. The increased use of deferred compensation should create a pipeline of bonuses that will be paid in future years, which will reduce volatility in industry tax payments.
DiNapoli also reported that:
- The securities industry in New York City has resumed downsizing. Between April 2011 and December 2011, the industry shed 4,300 jobs. During the financial crisis, the industry had lost 28,000 jobs, of which only 9,600 jobs had been recovered before losses resumed in April 2011.
- The average cash bonus declined by 13 percent to $121,150 in 2011. The average bonus declined slightly less than the total cash bonus pool because the pool was shared among fewer workers than in 2010.
- The average salary (including cash bonuses) in the securities industry in New York City grew by 16 percent to $361,180 in 2010, which was 5.5 times higher than the average salary in the rest of the private sector ($66,110). Data is not yet available for 2011.
- Compensation consumed a greater share of net revenue in 2011. The member firms of the New York Stock Exchange devoted nearly 52 percent of their net revenue to compensation (e.g., salary and bonuses for their broker/dealer operations) during the first three quarters of 2011, compared with 47 percent in all of 2010 and 36 percent in 2009.
- Before the start of the financial crisis, business and personal income tax collections from Wall Street related activities accounted for up to 20 percent of New York State tax revenues, but that contribution declined to 14 percent last year. Wall Street’s contribution to the City’s tax collections has declined from 13 percent of City tax revenues to less than 7 percent.
- In 2010, the securities industry in New York City accounted for 23.5 percent of all wages paid in the private sector despite accounting for only 5.3 percent of all private sector jobs.
- The decline in bonuses forecast by the Comptroller is consistent with the expectations in New York City’s budget but is not as great as the decline predicted by New York State for the broader finance industry, meaning revenues may be slightly higher than anticipated in the last quarter of the current state fiscal year.
And concluding the discussion is this rather curious piece appearing in Bloomberg of all places, which asks why anyone with a sense of personal morality go into finance? We have some ideas and they revolve around $320,00 bottle of champagne, and the externalities associated with that particular feature.
Many people assume there is something sleazy about the business of finance, or the people who practice it. This impression is probably behind the commonly voiced opinion that it is a shame so many young people today are going into finance-related occupations, when they could be doing something more high- minded in other fields.
It’s true that many people in business do seem to feel rewarded, for the short run at least, in putting salesmanship ahead of purpose and in cutting legal corners. They seem too focused on money to have moral purpose in their business affairs.
Yet if one lives in the real world, one has to work with, or even for, such people. They are a reality, and it makes sense to try to understand them -- to see if they are as simply sleazy as people think.
Positions in certain finance-related fields often offer more than the usual temptation to be less than honest -- because finance is a profession that offers, at least to the lucky few, astronomically high incomes. On occasion, we may even ask: Why would anyone with a sense of personal morality go into finance?
Read on here.