The size of your bank matters more than what you do with it, according to a new analysis. The chief executives of the country’s largest banks will always make far more than their counterparts at smaller banks, regardless of how well they do their jobs.
Shareholders in the eight largest American banking companies have seen a median return of about 38 percent since 2009, while the the next-largest ones offered a median return of over 100 percent. But even though smaller bank CEOs outperformed their bigger rivals by about two-and-a-half times, the heads of the the largest banks earned about 2.6 times what their better-performing colleagues were paid.
“There is strong evidence that size has been the key driver of bank executive compensation since the financial crisis,” according to analyst Frederick Cannon. In effect, getting your name etched on the corner office door at one of the biggest banks is worth more than a year of good performance for a smaller one.
That’s not to say that the second-tier bankers are doing badly, of course. The median annual compensation for that group was still about $35 million, according to Cannon’s analysis, which is quite large even by the already astronomical standards of corporate executive pay.
But what Cannon’s numbers reveal is that the link between job performance and pay is broken at the top echelons of the corporate banking world. The new analysis adds to a large body of evidence that CEO pay rules are failing to provide a meaningful curb on the corrupting tendencies of corporate compensation committees. CEOs routinely cheat the performance incentives their pay boards set up, and as a practical matter these supposed bonuses are essentially guaranteed even if the company misses targets. Worse, getting busted for fraud or bailed out by the feds or fired doesn’t put much of a dent in a CEO’s take-home pay. And taxpayers subsidize a substantial portion of this system because payments in the form of stock are tax deductible. In the shadow of this broken system, the ratio of CEO earnings to worker earnings has skyrocketed to 273-to-1 across the whole economy, and over 1,000-to-1 in some sectors.
The ability of CEOs at the largest banks to essentially charge rent regardless of job performance also has consequences for the financial industry itself, the Wall Street Journal notes. Citigroup, one of the nation’s largest firms, would likely be more valuable if it were broken up into several separate financial services companies. “But the current system,” the Journal says, “gives Michael Corbat, the CEO, and this team, a powerful reason to retain the status quo: their pay.” In that sense, the breakdown in the pay-for-performance system is helping to maintain the dangerously high concentration of American banking assets and exposes the economy to a greater risk of catastrophe.