This is getting to be a habit: today’s WSJ article claiming that Wall Street pay has hit a new record high in 2010 is seriously flawed. “In 2010, total compensation and benefits at publicly traded Wall Street banks and securities firms hit a record of $135 billion,” the paper says—but you have to really hunt to find the small print. First click on the “Interactive Graphics” tab at the top of the story, then click on “About our methodology” at the bottom of that tab. A window pops up in Flash, with uncopyable text saying this:
The analysis includes important caveats. Figures don’t reflect results of acquired companies before they were purchased. For example, BlackRock Inc. bought Barclays Global Investors in 2009, while Bank of America Corp. acquired Merrill Lynch & Co.
It’s not that the WSJ couldn’t have done a proper analysis. Certainly Bear Stearns and Merrill Lynch and Lehman Brothers were an important part of Wall Street compensation in 2006 and 2007, and they made their compensation numbers public. If you want to run the total amount of money paid to employees by public Wall Street firms over time, you have to include the firms which no longer exist.
The WSJ doesn’t do so, however—and, what’s worse, hides the fact that its analysis is woefully incomplete. The problem, I think, is with data providers, who are really bad at providing any kind of historical data for public companies which used to exist but don’t any more. Companies tend to be identified by their ticker symbol, and so when the ticker symbol disappears, so does the data—especially when the ticker is then taken over by someone completely different.
But it reveals little to say that Bank of America or JP Morgan are paying their employees more than they did in 2007, when the real comparison should be with how much Bank of America and Merrill Lynch combined were paying, or JP Morgan and Bear Stearns. (And WaMu, for that matter.) The WSJ has the resources to find SEC filings for old public companies and add them in to its calculations. Not to do so is just laziness, plus a natural gravitation towards the most sensational possible headline.
It's all fine and good to take issue with the metrics and claim a methodology is faulty, but if you're going to do so why not run the calculation the way you think you should be done based on the data available?
Right now, we're not sure whether you're complaining about 2007 compensation being higher than 2010 or not.
And when you calculate the profits of tanked companies, do the negative profits of the acquired affect your calculation or do the purchase price of those entities affect your calculation of profits for the acquiring company?
You're pointing at the wrong answer, but you're leaving it as an exercise for the reader to somehow calculate the right one.
What I thought was interesting about the graphic was the percentages:
The major use of labor in a FIRE economy
http://en.wikipedia.org/wiki/FIRE_economy
is to push paper around, and it doesn't take a lot of people to do so, paper being so light and all.
So seeing compensation rations of 30% for commercial banks and investments and 40% for securities makes me think that's a lot of golf money per person.
It also makes me ask how are these financial profits increasing while globally we are seeing economic stagnation, if not contraction?
I wish the WSJ's bouncing boxes went back further than 2007 so we could observe those percentages pre-crisis and post crisis/
I also thought of this:
http://www.huffingtonpost.com/james-kwak/13-bankers-in-4-pictures_b_537886.html
Seriously, I'd like to know where those non-internet bubble, non-mortgage backed security bubble profits are coming from. What are these people doing to earn that 30-40% cut these days?
#1 Posted by Thimbles, CJR on Thu 3 Feb 2011 at 11:26 PM
The other question I have about their methodology, from the site:
"Below is a breakdown of the firms in each category of the graphic:
Commercial Banks
J.P. Morgan Chase, Bank of America and Citigroup
Securities Firms:
Goldman Sachs Group, Morgan Stanley, BlackRock, Charles Schwab, TD Ameritade Holding, Jefferies Group, SEI Investments, E*Trade Financial, Raymond James Financial. Waddell & Reed Financial, Greenhill, Knight Capital Group and MF Global Holdings
Investment Advisors:
Franklin Resources, T. Rowe Price Group, Invesco, Legg Mason, Eaton Vance, Affiliated Managers, Federated Investors, Janus Capital Group and Cohen & Steers"
Isn't there a lot of overlap between these companies? Goldman offers Commercial Bank serivces and Investment Advice, doesn't it? It's hard to make claims about specific activities within sectors unless you examine the specific divisions within these companies handling those activities, yes?
#2 Posted by Thimbles, CJR on Thu 3 Feb 2011 at 11:41 PM