Wall Street Bonuses by the Numbers

by Ben Lorica (last updated Oct/2011)

Executive compensation is a sensitive topic in the U.S. But even the most ardent proponents of free markets agree that compensation needs to be tied to performance: if shareholders take a beating during a CEO's tenure, then compensation needs to be adjusted accordingly. The latest example of a well-compensated, but mediocre CEO is Leo Apotheker who just resigned from Hewlett-Packard. (See James Stewart's NYTimes article on HP: "Rewarding C.E.O.'s Who Fail"). To many executive compensation watchdog groups, the behavior of Wall Street executives in 2007/2008 remains a sore topic. Recall that financial services stocks started declining in 2007, and most stocks in the sector collapsed in 2008. But executives at these companies continued to draw millions in 2007/2008. Below is a graph of the compensation awarded to the Top 5 executives, in companies that borrowed money from the Federal Government under the TARP program. For context, I included company stock returns during the given year. If you're a shareholder at one of these companies, you probably don't want to reward executives during years when the stock goes down over 50%. But that's what happened in 2008 (and to a lesser extent, in 2007).

[Use the drop-down menu to toggle between years. Companies are arranged in descending order of loan size drawn under TARP.]

Total Pay, Top Five Executives (in $millions)
and Stock Return (%) in Given Year


Financialization of the Economy

The remainder of this page gives an overview of bonuses in the securities and investment banking industries. Before turning to bonuses, let's place the financial services industry in context. By the early 1990's, profits from the financial sector started to exceed those from manufacturing and other industries. The so-called financialization of the US economy accelerated from the late 1990's, before peaking in 2005, shortly before the 2007/2008 financial crisis.  
Total Corporate Profits as a percentage of GNP: 1962-2009
[ 2011 Economic Report of the President ]


NYC Securities Industry Bonus Pool

The growth of finance started in the 1980's, and annual bonuses followed the same upward trend. The dotcom crash in 2000 did lead to smaller bonuses in 2001/2002, but by 2003 bonuses were growing rapidly. One source on the size of bonus packages, is the NY State Comptroller:
".. an estimate of bonuses paid to securities industry employees who work in New York City. Bonuses paid by New York City-based firms to their employees located outside of the City (whether in domestic or international locations) are not included. (The) estimate is based on personal income tax trends and reflects cash bonuses and deferred compensation for which taxes have been prepaid. The estimate does not include stock options that have not been realized or other forms of deferred compensation."
While far from complete, annual estimates from the NY State Comptroller are useful for spotting trends in the securities industry. Bonuses are tied to the previous year's profits, and with corporate profits in the financial sector peaking in 2005, NYC bonuses reached an all-time high in 2006. Bonuses for the subsequent two years became public relations problems. Part of the outrage directed at Wall Street executives can be traced to the large bonuses awarded in 2007, a period when their shareholders lost billions. Outsiders also question bonuses for 2008, a year when many banks sought government funding, and mass layoffs took place in the financial services industry. Industry insiders defended 2008 bonuses as necessary for talent retention. More importantly, the last two years saw the largest NYC bonus totals, outside of the record breaking 3-year stretch from 2005-2007.  
NYC Securities Industry Bonus Pool, 1985-2010
[ Billions of Dollars ]

Annual bonus estimates from the NY State Comptroller's office is highly correlated with corporate profits from the financial sector & domestic equity markets, but the bonus payouts are definitely a lot more volatile: they rise (and fall) more abruptly.  
NYC Securities Industry Bonus Pool, Financial Industry Corporate Profits, and the S&P 500, 1985-2010
[ time-series have been normalized to have a common starting value of 100 ]


Investment Banking Compensation Survey

How have individual employees fared in recent years? The previous chart includes the annual average bonus payout as estimated by the NY State Comptroller. Annual surveys are an alternate source for individual-level bonus estimates. In the investment banking industry, there is an annual survey1 conducted by ".. a group of former investment bankers who have chosen to remain anonymous." The initial survey conducted in 2004 only had 48 respondents, but in recent years more than 300 investment bankers from 20 different banks have participated. In this particular survey, median bonus peaked in 2007 (at around $283,000):  
Wall Street Compensation Survey, Bonuses for 2004-2010
[ Investment Banking Compensation Survey ]

As the number of respondents have grown, survey organizers began reporting results based on job title2 and seniority. As you can see in the chart below there is a huge disparity in bonuses awarded. On average bankers received bonuses of several hundreds of thousands in 2007. As with the data from the NY State Comptroller, bonuses declined sharply following the 2008 financial crisis, but rebounded in 2009/2010.  
Wall Street Compensation Survey, MEDIAN Bonus by Position: 2006-2010
[ Investment Banking Compensation Survey ]

Related resources:
  • U.S. Federal Income & Capital Gains Tax Rates, and the Buffett Rule

  • U.S. Income Inequality: Share of Top Earners (1917-2010)

  • 2010 U.S. Census Survey: Income by Ethnicity and Gender

  • CEO Compensation: US and other countries

  • (1) From the 2010 Survey: "Please be advised that the data gathered in this report were submitted by investment bankers on a voluntary basis and without consultation of their respective employers mentioned herein. Although the results are screened for obvious mistakes or typos, WallStreetComps.com cannot guarantee the validity of the information presented. However, due to the nature of this report and the way data were entered, we are confident the information in this report is valuable and accurate."

    (2) For an interesting overview of investment banking, I recommend Karen Ho's ethnographic study.  
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