Wall Street pay hit a record $135 billion in 2010. Why is that so -- when the average worker hasn't enjoyed even a small raise? In fact, adjusted for inflation, U.S. median family income has declined 5% from its 1999 peak of $52,388 to $49,777 in 2009. The answer to the first part of that question: Wall Street is one of the few industries where America enjoys an undisputed global lead.
As to the second part, average workers can't get a raise because most other American industries face serious global competition, so they cut costs via layoffs and press for pay concessions and productivity improvements whenever possible. Wall Street is far from a workers' paradise -- some bankers got paid much more than others, and more of their pay is being deferred -- but it does pay its rank-and-file much better than average.
According to The Wall Street Journal, revenues at the top 25 Wall Street banks and securities firms (with market capitalization exceeding $750 billion) were up a mere 1% in 2010 to $417 billion. Their pay and benefits, however, rose far faster -- by 5.7% to $135 billion. Pay for 2010 represented a bigger portion of revenue (32.5%) than it did for the year before (31%).
Average compensation per Wall Street employee was up a mere 3% in 2010, to $141,000, according to the Journal. But this masks wide variations. For example, highly paid traders took 20% to 30% pay cuts in 2010 -- due to a trading slowdown in November and December -- while commercial bankers and hedge-fund managers had slight increases.
In my view, four factors account for Wall Street's high pay:
It attracts America's top talent. For example, Goldman Sachs (GS) recruits largely from Ivy League schools and puts its potential recruits through between 30 and 100 interviews designed to make sure they can handle stress and will fit into its culture. Many top banks recruit heavily from the ranks of PhD physics and math graduates, some of whom built the computer models for traders of those ill-fated credit default swaps and other derivative financial instruments.
Most of its work can't be outsourced to China or Bangladesh. Although some work -- such as preparing stock analysis reports -- has been sent to India, most of what Wall Street does requires workers who are steeped in the trading culture that works best in the U.S. and London, or who have relationships with CEOs of the largest companies.
It makes most of its profits by borrowing money to trade -- often using "insidery information." For example, Goldman made over half of its 2010 revenues from trading. Many Wall Street firms borrowed as much as $30 for every $1 of capital it traded. And, according to PBS, Goldman often uses what it knows about clients positions to place its own bets. As I wrote on DailyFinance in January 2010, such insidery information is technically legal, but it shouldn't be.
The U.S. government cushions its losses. As we saw in 2008, when the financial crisis hit, Washington (aka taxpayers) bailed out Wall Street with the $700 billion Troubled Asset Relief Program (TARP) and a total of $23.7 trillion in cash and guarantees. After pouring $5 billion into the coffers of Washington politicians and lobbyists between 1998 and 2009, Wall Street got a great return on investment. And when the Dodd-Franks financial overhaul law passed last June, it preserved too-big-to-fail banks. So, Wall Street is likely to get bailed out the next time around as well.
Why Other Workers Get the Short End
The same doesn't hold for America's other industries. That's not to say the U.S. doesn't lead the world in other industries. No other country can yet rival the U.S. when it comes to certain kinds of high-tech innovation. For example, Apple (AAPL) and Google (GOOG) lead the world in their respective fields. (And it's worth noting that Apple CEO Steve Jobs makes $1 a year in salary. His net worth of $6.1 billion is based on stock holdings in his successful companies.) But pay for typical workers in these companies is much lower than for Wall Streeters. (For example, according to SalaryList.com, the average salary for the 165 jobs it lists at Apple is $107,719 -- about 24% less than the Wall Street average).
That's because America has developed an even more unequal system for paying high-tech workers. If you happen to start a successful tech company and own stock that ultimately gets publicly traded, you can do far better than the average trader. But the risks you incur in starting such a company are much greater than the odds are on Wall Street. And high-tech companies also do plenty of outsourcing -- many Apple products are manufactured in China.
Also, the federal government doesn't guarantee the losses of high tech startups and their investors. As a result, much of the best scientific and math talent goes to Wall Street, where the risk is lower, the pay is higher -- and the social value is imperceptible (or perhaps, negative).
Wall Street was originally set up to raise capital for such startups and to help people invest for their retirement. It's those startups that create products and services that are useful to society. Until we can get Wall Street back to striving to achieve those purposes, America's financing tail will keep wagging its innovation dog.
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