Raging for close to five years now, the great battle over Wall Street bonuses has, at least in the United States, generated much more vitriol than action. Despite all the public criticism, investment bankers are still richly compensated, with few checks on their pay except whatever minimal sense of propriety they can muster.
Or are they? Goldman Sachs Group Inc. reported earnings yesterday, and one of the key numbers that’s worth noting is the bank’s ratio of pay to revenues, 37 percent. Take a look at the chart below and you’ll see that cements a decade-long trend. In 2001, Goldman paid out 52 percent of its revenue in compensation. That number has slipped steadily downward; the main exception to the trend was 2008, when bank revenue fell by more than half.
Goldman’s employees still got paid an average of $383,374 in 2013. That, though, is down from $498,246 in 2009. In Europe, legislation limiting bank bonuses has passed, but hasn’t yet to take effect (and we’ve yet to see what the effects will be: to work around limits on bonuses, Goldman is, believe it or not, increasing salaries). In the U.S., despite all the outcry, compensation caps aren’t even on the table.
So what’s driving the decline in the share of revenue that banks are paying out to their employees? It may not be the outside criticism at all. As the chart shows, the trend actually precedes the financial crisis. In the past it was normal in investment banking to shoot for a compensation ratio of 45 or 50 percent. Now the relative bargaining power of investment bank employees seems to have dropped, and paying them half the bank’s revenues no longer seems so necessary.
This loss in bargaining power parallels a trend in the rest of the business world. Bankers and traders have long contended that they are paid as much as they are because their skills are unique and irreplaceable. As with almost every other profession in a labor market that is increasingly transparent and international that has become less and less true.
PS: Whether you think investment bankers are overpaid and/or should be ashamed of how much they make for their work, it’s incontrovertibly true that the most direct result of lowering bonuses and salaries is to shift more money to bank shareholders. Mega-million dollar bonuses obviously have symbolic resonance, but the benefit to rest of the public from limiting them seems ephemeral. Since tax rates on personal income are high while those on corporate income are easily avoided, you could even argue that the public wins when banks pay employees rather than shareholders. So whatever the causes, cutting how much banks pay out in salaries and bonuses may not be much of a victory for the proverbial 99 percent.