For a while it looked as if compensation on Wall Street for 2009 would eclipse the record level of 2007, but in the end, the banks scooted in just under the bar, thanks to some last minute reductions by some of the Street’s biggest players. But that certainly does not mean that all is well in the world of Wall Street pay.
Take, for instance, today’s New York Times story on ailing banks that are nevertheless doling out huge bonus packages. This is a throwback to 2008, when failing banks like Merrill Lynch paid out huge bonuses at the same time that they were incurring catastrophic losses.
But one bank in particular stood out in the Times article: Citigroup. According to the Times, “Citigroup paid its employees so much in 2009 — $24.9 billion — that the company more than wiped out every penny of profit”:
[T]o keep up with the Goldmans, laggards like Citigroup are handing out fat slices of their profits, leaving little left over for their shareholders. Citigroup is, in effect, paying its employees $1.45 for every dollar the company took in last year. On average, its workers stand to earn $94,000 each.
This month, former Citigroup CEO John Reed slammed Wall Street’s return to stratospheric pay, saying “they just don’t get it. They are off in a different world.” And when Citigroup goes this route, “leaving little left over for shareholders,” that means leaving little for taxpayers, who still own the failed institution. I still can’t understand the hesitancy of Treasury to rein in Citigroup, considering the large stake that the government has in the company.
In the wider sense, this comes back to the inability (or reluctance, when it comes to investment banking) of shareholders to influence pay at the companies which they own. As James Kwak wrote, compensation ratios in the financial services industry should be closer to 30-40 percent (30 to 40 cents of each dollar earned going to compensation), and “shareholders should apply pressure to make this happen; basically, they should try to squeeze labor.”
And there are things the government can do to improve corporate governance and make things easier for shareholders — who often face a herculean task trying to influence anything — including institutionalizing shareholder votes on pay packages.
“The investor in America sits at the bottom of the food chain,” said John Bogle, the founder and former chairman of the Vanguard Group mutual fund. “The financial industry gets paid before their clients, and we get paid whether times are good or bad.” Oh, and Citi will also be hosting a cocktail party at the World Economic Forum in Davos, Switzerland, this week. Can every taxpayer, then, crash it?