Saturday, April 02, 2011

Financial Sector Compensation at Obscene Levels

The issue of outsized CEO pay has gotten plenty of attention in recent years, and for good reason.

According to data compiled by the Institute for Policy Studies, the average American CEO earned 319 times the salary of the average U.S. worker in 2008.

It was an enormous increase from historical trends; in 1980, the ratio between CEO and worker pay was 42 times.

So, in the intervening three decades, things got really out of whack.

A report by the Economic Policy Institute looked at top CEO pay in 2007 and found that, "In 2007 a CEO earned more in one workday (there are 260 in a year) than the typical worker earned all year."

This isn't simply a matter of fairness, it's a matter of lost jobs — lots of them.

A reduction in the CEO pay multiple to the 1980 level would allow the average U.S. company to hire an additional 277 workers. This reduction, applied across the Wilshire 5000 index, would create nearly 1.4 million jobs, according to

In no other place is the scale of executive compensation more outrageous than on Wall St. and in the financial sector as a whole.

Bartlett Naylor of Public Citizen has just issued an eye-opening report titled, "A Modest Essay About Extraordinary Paychecks", which examines executive compensation on Wall St.

How out of line is executive pay on Wall St.? Well, consider the following:

In 2009, hedge fund manager David Tepper made President Obama’s annual salary every fourteen minutes.

President Obama earned $400,000 in 2009, or $200 an hour.

Tepper, the best paid hedge fund manager in 2009, made $4 billion. Assuming an eight-hour working day, and 2000 hours per year, that amounts to $2 million an hour.

To provide some perspective, per capita income in the U.S. was $46,436 in 2009. This works out to $23 an hour.

Millions and billions are both very large sums, but the difference between a million and a billion is profound: A million seconds is about 12 days, while a billion seconds is 30 years.

Tepper donated $55 million to Carnegie Mellon University, which, at first blush, seems exceedingly generous, until you discover that it was half a week’s paycheck for him.

According to Forbes, Oprah Winfrey was the best paid entertainment figure at $225 million, or $112,500 every hour.

But there is only one Oprah. There are lots of Wall St. bankers and other assorted financial overlords.

Thomas Montag, president of global banking at Bank of America, received $29 million, or $14,500 an hour. Yet, that was a mere pittance compared to Tepper.

Clearly, Wall St. is the place to be if money is your highest aspiration.

James Simons of Renaissance Capital led the list of best paid hedge fund managers in 2006 and 2008 with more than $1 billion in annual compensation. Yet, even after the financial crash, Simons is estimated to have earned $2.5 billion in 2009.

So the problem of excessive compensation is actually getting worse, despite the bad economy.

Notwithstanding his $2.5 billion in earnings, Simons was only third on the list of highest paid hedge fund managers in 2009.

Yes, there are even bigger fish in the Wall St. shark tank.

In 2010, hedge fund manager John Paulson exceeded David Tepper’s 2009 earnings of $4 billion by securing an estimated $5 billion in fees and profit share from his firm. That’s $2.5 million each hour. Or $42,000 a minute.

If you total the national economic output of the bottom 14 nations of the globe, you would still come a half billion dollars short of the $5 billion Paulson received in 2010.

That's right; one man out-earned the entire GDPs of 14 entire countries.

In 2010, Paulson also made about the same money as the revenues of Gannett, the company that employs 32,500 workers and produces 83 daily newspapers, including USAToday.

Mr. Naylor goes on to detail just how out of line hedge fund compensation is compared to executives in other industrialized nations, such as Japan, Germany and the UK.

As Naylor notes, hedge fund managers "place bets against other gamblers, and for every dollar they win, someone else loses."

That's because hedge fund managers are allowed to sell short, meaning they can profit when a security falls in value.

The simple truth is that hedge fund managers don't create anything tangible and they don't add to the economy. They simply move existing money around the Monopoly board, while skimming off the top for themselves.

How much is enough for Wall St. types? Clearly, the sky is the limit. Too much is never enough because neither exists in their world.

Vanguard founder John Bogle's book "Enough" attempts to measure what really counts in life.

The title, as Bogle explains, comes from a conversation between Kurt Vonnegut and novelist Joseph Heller, who are enjoying a party hosted by a billionaire hedge fund manager.

Vonnegut points out that their wealthy host had made more money in one day than Heller ever made from his novel Catch-22.

Heller responds: "Yes, but I have something he will never have: enough."

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