The pay packages for Wall Street’s highest executives is coming under a new sort of scrutiny. This time what seems to have attracted attention is not so much the huge amounts of money the chief executives received by chief executives of investments banks—but the strange similarity in the pay packages. We noticed this a couple of days ago when Bloomberg’s otherwise measured reporting on the compensation of Bear Stearns chief executive James Cayne—who was reportedly paid $40 million for last year—was interrupted by a not-so-subtle implication that there was something odd about the fact that so many of the guys running Wall Street’s banking firms took in similarly sized pay packages despite the variety in the size of the firms. Why does the head of Bear Stearns get paid as much as the head of, say, Lehman Brothers?
Today Bloomberg columnist Graef Crystal drops the “subtle” and “implication” part and comes right out and says that he thinks there is something fishy going on. "Is Goldman, Lehman Pay Set in Smoke-Filled Room?" his column asks.
So why, when there is so much disparity in sales and net Income, is there so little difference in pay? Is it just coincidence? Possibly. Although total pay packages have become more and more similar, there is still some healthy variation in different forms of pay, such as base salaries and annual bonuses, as well as free stock and option awards.I have an alternative theory that takes its page from the Old West: circle the wagons. If you're going to pay more than any other industry and by a substantial margin, it helps if you can justify your compensation by holding up the numbers of your industry peers.
So is it a smoke-filled room? Circled wagons? Is the fix in? Or is there perhaps less than meets the eye? More on this later today. It's way too early in the morning to start talking about wage curves and positive correlations.
Is Goldman, Lehman Pay Set in Smoke-Filled Room? [Bloomberg]
Posted by anon, Apr 04, 2007 11:35AM
It's called "Compensation Department", located in the HR area.
They buy research from compensation research companies which provide market data on executive compensation of the company's peers.
Then they take that data, through it into a database and then create pretty Excel charts showing "Look, IB #1's CEO gets this much, IB #2's CEO gets this much, and our CEO gets that much. Therefore, we should give him a raise otherwise he will leave due to under-compensation."
They do this also for all the other levels, executive and non-exec.
note: I did a contract job developing reports (just like this) for a bank.
Yeah, not as interesting as a grand conspiracy, but rather a function of the market working and also SOX (the comp department needs to create all these and other stupid reports showing what various execs are paid to comply with SOX).