Pay, Wall St, and Legislation

Compensation for Wall St has received so much attention lately. It came to a head about three weeks ago when news broke almost simultaneously that Merrill Lynch had moved up their $4 Billion bonus payments and the industry as a whole paid around $18 Billion to its executives and employees. That is a big number and it is the sixth largest ever.

Were these numbers disproportionate to performance? Absolutely, but the story was going to be damaging no matter what the figures were. The idea of a bonus is not the same for Wall St and Main St. On Main St a bonus is an additional reward to an employee that has improved the company in some extraordinary way. But on Wall St it is simply a variable part of normal compensation. Salaries for many Wall St executives are relatively low and the inherent agreement is that the rest is made up through a bonus. This system works for Wall St. Why? Because of why everyone really hates them, it isn’t based on what you know but who you know. And bonus money is paid out to who you bring in (and their accounts). Once you have their relationship you can charge fees and further expand a prestige of portfolio size and it feeds on itself. There are very few on Wall St that actually create real value, the rest is mostly a who you know industry.

President Obama legislated a cap on pay at companies that received bail out money. This is a knee jerk reaction to a sensationized story about bonuses. It paints talent at these companies with a broad brush. There are many employees at these companies that did perform well. Putting restrictions on pay undermines Human Resource management within these companies. Granted, if poor performers were still getting a wink-wink nod-nod lump sum then the HR teams weren’t doing their job, but those cases are the exceptions and not the norm. HR within these companies need to worry about their hiring brand. If these companies are to rise out of these situations then you need the best employees moving to the top and compensated for sticking through the hard times. The plan does call for some good long term motivation as well, via restricted stock. So it isn’t all bad.

A more suitable form of legislation would have been to tie a multiple to the executives pay. What I mean is that no executive can make say 25 times as much as the lowest employee makes. For instance say the lowest paid employee makes $12 an hour, that means the executives can make $624,000. If the executives wants to make more than that then he must make sure the company can grow and distribute the proceeds more equitably.

Here are some numbers and illustrations I pulled from my 300+ entries over the last year and half:

According to the most recent proxy filings, which covered 2007 results, only 47 percent of the companies made the required disclosures concerning short-term incentive pay, like cash bonuses. While this figure is substantially higher than the 23 percent that complied with the rule in 2006, it is nonetheless distressing.
On long-term incentive pay, which typically includes grants of stock options or restricted shares, the compliance was a more robust 62 percent last year. In 2006, only 41 percent of companies adhered to the rule, the Reda study showed.
While productivity jumped almost 20 percent since 2000, the real median
hourly wage of all workers rose just 3 percent in the same period.
Since 2003, productivity has risen 5 percent, while the median hourly
wage fell 1.1 percent.

Yet, in the period between 2003 and 2007, wage gains for median
workers, male and female, as well as high school and college workers
have all been flat or falling.

Not so for workers at the highest
end of the wage scale. At the 95th percentile, real wages have risen
9.4 percent since 2000 and 5.1 percent since 2003.


The average CEO of a large U.S. company made roughly $10.8 million last
year, or 364 times that of U.S. full-time and part-time workers, who
made an average of $29,544, according to a joint analysis released
Wednesday by the liberal Institute for Policy Studies and United for a
Fair Economy.

That gap is down from 411 times in 2005 and well-below the record high
of 525 times recorded in 2000. But the comparison isn’t exactly
apples-to-apples, in part because IPS and UFE changed how they measured
CEO options pay this year (2007).


In their National Bureau of Economic Research working paper, Thomas Philippon of New York University and Ariell Reshef of the University of Virginia
found that the difference in pay between finance and the rest of
industry was slight, if any, except in the late 1920s to 1930 and then
again from the mid-1990s to 2006. In those boom years, compensation in
finance was 30 percent to 50 percent higher than in the rest of


Gallop poll conducted in early August that revealed 48% of Americans
“completely satisfied” and another 42% are “somewhat satisfied.”


Adjusted Tax Returns:

2000 – $57,289
2001 – $51,870
2006 – $58,029
Percent increase from 2000 to 2006 – 1.2%

Total income increase by $619.2 Billion, an 8.3% increase

All of it went to people earning more than $75,000
$260 Billion of that total went to those making over $1 million

Average Wage:

2000 – $47,097
2003 – $45,956
2006 – $46,996
the South and Southeast rank #1 as the place where senior level job
growth is most happening. The West was next followed by the Southwest.
The Northeast and New England placed fifth. And the reason given for
the first place rank and the fifth place rank is the cost of labor.

Wall St Bonuses:

  • $18 billion less in pay and benefits compared to 2007
  • If true, this would easily surpass 2001 when the drop was by $6.5 billion
  • The city would lose about $10 billion in potential incomes to tax
  • Compensation for six of the largest firms show a decline of $9.5 billion in the first half of 2008 when compared against 2007

Other stats:

  • Year end bonuses for investment bankers usually comprises at least three-fourths of their income
  • Wall St. employs about 178,000 workers in NY city
  • Normally, these payments contribute to about 10% of NY city’s tax revenue and 20% for the state.
  • The projected decline in state tax revenue is by $700 million

From July 2008:

Some stats from an article today by Barney Gimbel called The New New World Order.

The 54 developing markets surveyed by Global Insight will post a 6.7% jump in real GDP this year

  • down from 7.5% last year
  • The 31 developed countries will grow an estimated 1.6%

The middle class in China is expected to multiply sevenfold by 2020

  • to 700 million people

The middle class of India is expected to multiply by tenfold

  • to 583 million people

New homes require building materials

Since 2000 the prices of steel, oil, and copper quadrupled

Wal-Mart’s (WMT, Fortune 500) international sales grew 17.5% this year

  • triple the US
  • now constitute 24% of the company’s total revenue, up from 8.9% a decade ago


India inflation rose to above 8% in May

  • below 4% last August

Chinese inflation was 7.7% in May

  • up from 1% in early 2006

Ukraine and Venezuela see inflation at 30%
Vietnam is experiencing 25% inflation




  • The value of job mobility adds up faster in the early stages of
    a worker’s career. Women tend to move less than men, but still pretty
  • Mobility early in careers is considered a wage asset as
    long as it isn’t based on layoffs, discharges, or leaves. A positive
    wage compared with job stability can result based on these moves.
  • A plateau effect can take place eventually because the lack of a five year tenure at any job.
  • Each
    year of tenure is related to approximately 2.4% wage increase for men
    and 2.9% increase for women. These increases compound each other for up
    to five years.
  • After five years wage growth starts to either plateau or erode.

Other facts I thought were important:

  • Men are laid off more frequently than women.
  • Married men experienced greater wage outcomes when switching jobs than single men and those without children.

2006 median household earned $48,201
1999 median household earned $49,244
What disappoints me is from about the 2002 time frame until recently,
productivity was surging, but income wasn’t following suit. Much of the
productivity gains went to executive’s incentive deals, or at least I
thought it did. Some of it is sitting in a bank account. It just isn’t
the common worker’s bank account.

1998 Cash Holdings on Balance Sheets – $203 Billion
2008 Cash Holdings on Balance Sheets – $600 Billion
Here are the productivity statistics for the fourth quarter of 2007:

  • Overall productivity increased at a annual rate of 1.8% (nearly double what analysts thought)
  • This is compared to an increase of 6% in the third quarter
  • For all of 2007, productivity was up 1.6%
  • In 2006 it was 1%
  • Earlier in the decade (2000-2004) productivity averaged 3.2%
  • Labor costs rose by 2.1 percent (a little lower than analysts expectations)
  • Labor costs fell by 1.9 percent in the third quarter
  • Labor costs fell by 1.1 percent in the second quarter
  • For all of 2007, labor costs were up 3.1%
  • For all of 2006, labor costs were up 2.9%
  • GDP was 0.6% in the fourth quarter (revised to a contraction of 0.2%)

productivity outpaces labor costs then living standards improve. Why?
Because it allows businesses to pay their employees more without
raising the cost of their goods, which keeps inflation in check. That
didn’t happen in the fourth quarter of 2007.

Revision: Productivity was revised to 1.9%
Revision: Labor costs changed from 2.1% to 2.6%
Here is a list of what some of them were paid (these numbers come from forbes):

Charles Prince – in 2006 from Citigroup

  • $1,000,000 Salary
  • $13,200,000 Bonus
  • $11,775,719 in other compensation (stocks of some sort)

Richard Parsons – in 2006 from Time Warner

  • $1,500,000 Salary
  • $0 Bonus
  • $20,979,353 in other compensation (stocks of some sort)

Stanley O’Neal

Bruce Chizen – in 2006 from Adobe

  • $925,000 Salary
  • $681,262 Bonus
  • $3,258,971 in other compensation (stocks of some sort)

Bruce Chizen left Adobe under the premise of my earlier post titled Next Generation CEO
The statistics are amazing in the relationship between earnings and
likelihood of accepting blame and apologizing for it. Those stats are:

Willing to Apologize               Earnings
         92%                    $100,000+
         89%                    $75,000 – $100,000
         84%                    $50,000 – $75,000
         72%                    $35,000 – $50,000
         76%                    $25,000 – $35,000
         52%                                   – $25,000


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