Print

Email story

Comment

Email editor

Raise a glass of egg nog to Wall Street's season of excess

By WASHINGTON POST
Published December 22, 2006

It's bonus season on Wall Street and there's plenty of holiday cheer this year. The New York state comptroller this week said the securities industry will distribute envelopes stuffed with about $24-billion - a sum larger than the gross national product of many countries.

Near the top of this year's list is Lloyd Blankfein, who will take home $53.4-million in his first year as CEO of Goldman Sachs. That's a record for the head of any Wall Street investment bank and reflects another year of record trading volume.

And get this: Blankfein probably isn't even the highest-paid Goldman employee. The word is there is a handful of hot traders who will earn even more than the boss.

Who says Wall Street isn't a meritocracy?

I do. Nobody who is hired help and who plays with other people's money "deserves" to earn $100-million. That's certainly true in a moral sense. But it is also true economically. For despite what you hear from all the apologists about the "market" for financial superstars, this is a highly imperfect market.

Let's start with the fundamental asymmetry of risk in the investment business.

If you were putting your own money at risk, there's the possibility of making lots more, but there's the possibility you could lose it all. The same, however, can't be said if you are an investment banker, a hedge fund manager or a trader in credit default swaps. In that case, if you do well, you get a percentage of the winnings or the value of the deal. But if you do poorly and your clients lose money, the worst that happens is that your bonus is zero.

My biggest problem with the rationalizations for Wall Street pay, however, has to do with the widely held misconception that top executives are somehow entitled to some fixed percentage of the profit or a percentage of the gain in a company's market value.

This is, of course, the way we calculate waiters' tips. And it makes sense for small, closely held partnerships. But today's large, global corporations have become so big, the numbers so large, that they provide inappropriate benchmarks when calculating the compensation of a single human being. There's no limit to how big a company can get, but human beings are limited in how much they can eat, or how many homes they can occupy or how many days they have to take vacation.

Why should we care about Lloyd Blankfein and his millions? The answer is that excess compensation in one area leads to excess compensation in others.

A couple of summers ago, I played golf with a fellow who turned out to be a director at Tyco International. I casually asked him why Dennis Kozlowski, who got a big salary and bonus, was so piggy that he had to have a New York apartment and artwork paid for by the company. His reply was fascinating: Kozlowski, he said, was resentful that while he was masterminding Tyco's growth strategy, arranging for acquisitions and creating value for shareholders, he was still making less than the investment bankers he hired to do the deals.

And that, in the end, is how this arms race in executive pay comes about. It's more about envy than economics.

[Last modified December 22, 2006, 01:13:29]