Are Wall Street bonuses too small?

Wall Street banker bonuses are supposed to be kept secret for a variety of reasons. If everyone knew who was paid what, there would be an uprising as people discovered that clear underperformers were getting compensated more than them. It happens. Wall Street compensation is not always about performance. As I outlined in a column earlier this year, it’s largely driven by office politics. I didn’t tell anyone what I received when I worked at Lehman Brothers Holdings Inc. outside of my partner on the exchange-traded fund trading desk.
Information about very large bonuses became public in Lehman’s bankruptcy filing, which had a list of the highest-paid employees in the firm. My boss’s boss made $8 million a year, and his boss made $25 million. A handful of people were making from $60 million to $80 million. The response within the firm was: so that’s where the money went. I was making $850,000, which is nothing to complain about, but I felt I probably deserved an extra couple hundred thousand. Bonuses, though, are a zero-sum game. A certain percentage of profits is allocated to compensation, and if one person gets more, someone else gets less. That’s just how it works.
This may seem like an odd time to be talking about Wall Street compensation, as it isn’t bonus season, but banker compensation is in the news. Cantor Fitzgerald CEO Howard Lutnick is currently at the center of a lawsuit alleging that his $50 million compensation package constituted “excessive pay” relative to the value he added to the firm’s commercial real estate unit. And Johnson Associates just released a widely-followed report predicting that bonuses for those underwriting debt and equity could tumble more than 45% this year, while those advising on mergers and acquisitions could see a drop of 25%.
Huge divisions in pay within a bank is an underappreciated risk. Those employees, especially at the lower end, who feel they aren’t being fairly compensated may also feel as if they don’t have any “skin in the game.” They may not work as hard to drum up revenue, or they may be willfully indifferent or oblivious to capital market risks. There is also the phenomenon where older, more experienced, highly paid employees are eliminated and replaced with junior employees. Ben Ashby, a former managing director at JPMorgan Chase & Co’s Chief Investment Office & Treasury, wrote a column for Bloomberg Opinion in 2021 about this “juniorisation” of Wall Street, and how 40% of the senior risk managers had been let go at Credit Suisse leading up to the Archegos Capital Management debacle.
Experience is very important on Wall Street, especially in trading and risk management. Keep in mind that someone 36 years old working on Wall Street today did not experience the financial crisis in his or her professional life. They’ve only worked in a market and economy supported by zero interest rates and extraordinarily loose monetary and fiscal policy. The problem with senior risk-takers and risk managers is that they are expensive.

—Bloomberg