More out-of-control salaries
Posted by metaphorical on 25 February 2007
Late last year, Manhattan jeweler Ruedigar Albers sold a $31,000 Patek Philippe watch to an investment banker who’d just closed a big deal. The banker liked the watch so much he placed an order for another one on the spot — saying he might give it to a colleague.
According to a survey of more than 200 Wall Street professionals who took home at least $2 million in cash from their 2006 bonuses, respondents are spending 11% of their payouts, on average, on watches and jewelry. For even the lowest-paid bankers in the survey, that’s a bling budget of more than $200,000.
The other day I wrote about CEO compensation. A story in Friday’s Wall Street Journal shows it isn’t just top salaries that are out of control.
The first problem raised by this story is the extreme greed it depicts, of Wall Street wealth and year-end bonuses so great that some recipients have nothing better to do with it than buying a second $31,000 watch.
The second problem with the Journal itself. Let’s look first at the money, and then what the Journal has to say about it.
While the poll, by wealth-research firm Prince & Associates of Redding, Conn., is only a sampling of the Street, it adds to growing signs of an entirely new level of consumption there. Last year, Wall Street bonuses jumped an average of 15% to 20%, meaning that the senior bankers with the title of managing director received average pay of between $2.2 million to $3.8 million, according to the Options Group, a New York consulting firm. Overall, according to an estimate released by New York state, Wall Street will pay a record $23.9 billion this year in bonuses.
The Journal’s take on this is that
The average amount diverted to savings and investments, meanwhile, is 16.5%. “What surprised me is the low savings and investing rates for people who are making millions of dollars a year,” says Russ Alan Prince, president of Prince & Associates. “This says to me that Wall Street expects the good times to continue.”
But as it turns out, and as the Journal itself reports, they’re not just buying bling, they’re investing – they’re just not putting it all in 401Ks.
The Street crowd is spending the biggest share of its bonuses on homes, especially second or third ones: Some 16% of last year’s bonuses went toward purchasing residences, with another 10% going toward home improvements. Respondents say they’re spending about 12% of their money on fine art and collectibles, while 14% went toward “other” — a category that includes hobbies such as horses and flying lessons, as well as “mistresses and other lovers.”
A solid 26% of the bonus money was invested in homes; when you add the “savings and investments,” you’re at 42.5%, and with the resellable goods, 56.5%. Here’s the thing, though. Wall Street had a good year last year, and this year is 15-20% better. So if, hypothetically, the same dollar amount was used for investement, broadly understood, last year, it would have constituted as much as two-thirds of the bonuses. If they thought they were investing enough last year, why not spend the extra 15-20% this year largely on bling?
Which leads to the real problem with the Journal’s interpretation of its own numbers. Maybe the reason the investment quotient isn’t as high as the puritanical Journal thinks it should be isn’t because of an expectation that the good times will continue to roll, maybe it’s because they’ve been rolling for half a decade, and, really, for a decade and a half with only a small interruption.
Maybe the reason the Street crowd isn’t investing more in homes, for example, is that they’ve already done so. Think about – what would be the first thing a New Yorker would do with a bonus? Pay off their mortgage. So that was probably done several years ago.
The next problem is the “bling budget of more than $200,000.” Relying on averages, a simple arithmetic mean, for a story like this is hugely misleading. The odds are, the people with the biggest bonuses are spending the most on bling; the people with the smallest bonuses are probably spending the least. A story like this is best reported in scenarios of individuals and their spending, trying to find a handful of typical people, and things like what the median person does, not by looking at averages that may represent what no actual person does. Of course, that would involve some real reporting, something much harder and more time consuming than reading a study and hitting the “average this column” button in Excel.
That’s all not to say that the biggest problem is the Journal’s reporting. That would be Wall Street’s sense of entitlement.
“I work 18-hour days, six days a week. I’m sitting on planes for 20 hours straight and I’m dealing with high-pressure decisions,” said a top banker from Morgan Stanley. “I deserve rewards.”
Thanks to my friend Jean for the link, here, which should be good for another few days.