Your Comp May Be Down This Year, But At Least You’ll Have The Satisfaction Of Annoying A Random Shareholder ActivistBy Matt Levine
Hey, so, if you work at a bank, you may have heard about this, not sure, but your comp will be down. Just a bit. Unless you’re a junior mistmaker Chez Dimon. But otherwise, yeah. Down.
Another thing you may be less aware of is that some people are actually not so unhappy about that. A few of them even think that it’s possible that your pay should be down some more. And they think someone should really look into that:
Giant firms are expected to cut executive pay by some 30% from 2010 levels, consultants say. And since the financial crisis of 2008, firms have reduced cash bonuses, increased their use of company stock and added clauses that allow them to recoup—or “claw back”—pay in certain circumstances.
Even so, some investors want more changes. In December, the Nathan Cummings Foundation—a private charitable organization and institutional shareholder—filed proposals asking that directors at Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. address potential reputational damage that big pay packages could bring to the banks, said Laura Campos, director of shareholder activities at the foundation. The proposals also request that they study how such awards could reduce banks’ ability to spend money on other areas, and report those findings to shareholders.
Shareholder resolution activists (not to be confused with, like, real activists) are mostly pretty silly creatures and this is a pretty good example of why. The Journal tries valiantly to make the efforts of Nathan Cummings and his eponymous foundation relevant to the hot-button issue of how much bankers get paid, but it’s pretty clear that the NCF is focused on a thing called “executive pay.” Executive pay is sort of an irrelevancy for investment banks, mostly, since it makes up a relatively small fraction of comp, and since lots of people at banks get paid executive amounts of money without being a named executive officer. And as long as the Nathan Cummingseses of the world are focusing on how much the Lloyds/Jamies/James-not-Jamies of the world are getting, they will probably stay away from your now-30%-paltrier comp.
Other fearless crusaders for shareholders have noticed this, however, and are more interested in going directly after your money, though they have yet to resort to the rather infra dig expedient of shareholder resolutions. Instead they do things like complain to Andrew Ross Sorkin, who earlier this week said:
While the total compensation reported by big banks in their 2011 results may be lower, keep an eye on another, and perhaps more important, yardstick that is likely to increase at some firms: the compensation-to-revenue ratio. … It is an odd Wall Street paradox: in down years, a higher percentage of a firm’s revenue is paid to employees.
Now, my immediate reaction was: that is neither odd nor a paradox. In down years, a higher percentage of a firm’s revenue is paid to cover its costs. I’m gonna go out on a limb here and say that, in down years, firms typically have lower profit margins. Since the costs of an investment bank are basically airfare and comp, in down years comp will come down more slowly than revenues. That’s mostly just a fact of life.*
Just for giggles we made some charts. The first is the ratio of comp to net income for an assortment of bank-type objects:
So, yeah, evil bankers, taking all the moneys from the shareholders! Clearly the share of revenue going to bankers is going up, and the share going to shareholders is going down – the median ratio goes from 1.5ish to 2.8ish in the past five years. But, of course, that’s mostly in years where revenue has been challenged. For more pensive giggles, here’s a graph of the median (of those banks) ratios of change in net income and comp to change in net revenues.
This is sort of what you’d expect – that the volatility of net income should be higher than the volatility of revenues, which should in turn be higher than the volatility of expenses. The trend, though – and these are volatile years so you shouldn’t read too much into it, and 2011 mainly looks weird because Q4 often adjusts for this sort of thing a bit – certainly suggests that as time goes by shareholders are getting more of the experience of revenue swings, while bankers are getting less of it.
One reason that people can go around saying it’s a “paradox” for bankers’ pay to go down by less than their revenue is that the industry has a long-standing rhetoric of pay for performance, and of comp that consists mainly of a performance-based once a year bonus. Recent reforms that have moved more pay into base pay, the departure of people whose comp is volatile because it’s large, and the retention of people whose comp is relatively fixed but kind of small, have all changed that mix a bit.
Shareholders should maybe get all sad and resolution-y, I don’t know, whatever. On the other hand, we’ve talked before about the idea that maybe tying banker pay really closely to equity-like returns has some scary characteristics for the rest of us. If you believe that point of view, and I sort of do, then you might have some reason to be pleased that changes in pay lag changes in revenue.
In any case. Whatever your viewpoint, if you work at a bank, maybe you should look into getting your revenues up? Because, yeah. Your comp is down.
A Paradox of Smaller Wall Street Paychecks [DealBook]
* Quick bonus chart. A fun thing to do when media people criticize banks for their comp ratios is to point out that businesses that basically transform human intelligence and effort into money pay out a lot of that money to the humans who provide that intelligence and effort. One such business is media! I’ve made that silly comparison before. The Times transforms human whatnot, like, paper and stuff into money so its comp ratio appears to be lower, low 20s percent rather than 40s for many banks. But, just like Goldman Sachs, their comp ratio seems to go up when revenue goes down. So, gotcha, sort of. Though look at 2010. A lesson of these charts may be: if you’re in an industry where revenues go down year after year, rather than just a volatile industry, eventually comp is going to catch up. Think about that.