From the Pages of The Pomerantz Monitor: Return of the Overpaid Investment Banker

As Joshua Silverman reports in the May/June issue of The Pomerantz Monitor, when it comes to sharing the pain caused by the economic downturn, corporate America has two standards: one for the working class, and another for highly-paid executives.

When business hits the skids, workers are routinely asked to, and do, shoulder large cuts in pay and benefits, and many are laid off. Auto workers and airline employees, among others, have suffered repeated layoffs and drastically reduced their total compensation under hard-earned collective-bargaining agreements. But corporations treat their executive compensation agreements differently. Contracts suddenly become “inviolable” or are even sweetened substantially. Companies rarely ask their top executives to take a pay cut, even when they are hurtling towards insolvency.
Nowhere is the insulation of top executives from the consequences of their own failures more apparent than at the investment banks. All have taken billions of dollars in taxpayer bailouts after their recklessness drove the global economy into a recession. Under these circumstances, one would expect that belt-tightening would be in order. Although payouts were down last year, they seem ready to bounce right back.
Salaries at large Wall Street institutions currently stand at near all-time record levels. As the New York Times recently reported, the first quarter 2009 payments suggest that Goldman Sachs will pay its employees an average of $569,220 per worker, less than 1% down from 2007’s record payout. First quarter salaries for the 26,142 employees in JPMorgan’s investment banking and trading divisions annualize out to an average of $510,000. These are not salary averages of the bankers only, but of all employees from receptionist to CEO.

Investors pay a heavy cost for these obscene salary levels. Compensation costs can eat up 50% or more of an investment bank’s revenue. Reducing them would substantially increase profitability, allowing the banks to return more to investors in the way of dividends and share buybacks, and to redeem more quickly the TARP handouts they receive from U.S. taxpayers. This in turn would reduce the banks’ expenses and increase their tangible common equity.

Investment banks wrongly attempt to justify huge salaries by saying their most important assets walk out the door every night. Skilled workers are critical for all businesses. But investment bankers have driven their companies, and our economy, to the brink of disaster. As a group, they deserve pay cuts, not increases.  
The worst show of arrogance comes from one of the worst banks – Citigroup. Shareholders have seen their investments lose over 90% of their value since CEO Vikrim Pandit took the reigns. Yet last year, Pandit’s compensation package totaled $10.8 million. Despite the stock’s drubbing, Citi touts that Pandit is critically valuable both to the bank and our economy. Citi’s CFO even told an interviewer that replacing Pandit would be “incredibly destabilizing” for our entire financial “system.”

There are glimmers of hope. CalPERS and other institutional investors forced Bank of America to separate its Chairman and CEO positions after learning that CEO Ken Lewis approved huge bonuses for Merrill Lynch executives right before that company (now a subsidiary of Bank of America) disclosed huge operating losses.  But as the first quarter 2009 figures indicate, the country’s top investment banks still don’t get the message.  Banking salaries need to adjust to our new economic reality.