A Market Solution to Wall Street’s Pay Problem

Posted on January 28, 2010

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I meant to write this post earlier in the week, but got sidetracked.

The cover story in the January 25th issue of Barron’s analyzes the excesses of Wall Street pay and proposes solutions that don’t involve the government attempting to regulate compensation practices.

You should definitely click through and read the entire article, but here are a few highlights:

  • Big Wall Street firms are not acting in shareholders’ interests when it comes to employee compensation: “It’s time for an end to the notion that Wall Street employees are entitled to half the firm’s profits.”
  • The argument that firms must pay top dollar in order to remain competitive may not be so strong. As Barron’s puts it:

Wall Street firms have long defended outsized compensation as a necessary evil needed to attract and retain top moneymaking talent. It’s the free market in people, our most valuable resource, the firms said. That always seemed a stretch.

The reduced pay levels of 2009 will be a test to see whether key employees bolt or stay put. Our bet is that the vast majority of the people who matter don’t go anywhere. Compensation levels are being reduced Streetwide, which means that there probably aren’t many other greener pastures. Additionally, more compensation is in the form of stock that vests over several years, tying employees to their firms.

  • Shareholder returns in major Wall Street firms have been terrible for the past decade: “Let’s face it. Wall Street has been a great place to work, but a lousy place to invest in the past decade. . . .Let the Street pay people well. Just don’t give away the store to them.”

In boom times, when everyone is making money, shareholders aren’t overly concerned with lavish pay packages. It’s different when times are tougher. I wouldn’t be at all surprised to see over the next year or two shareholders reasserting themselves as the true owners of public companies and forcing executives to drop more revenue to the bottom line instead of lining the pockets of employees.