Amid reports that Wall Street bank pay and bonuses have decreased an certain percentage in 2011 compared to 2010, DealBook’s Andrew Ross Sorkin is highlighting another metric to analyse the salaries that’s making Wall Street pay look a lot less gloomy and a lot more outlandish—the compensation-to-revenue ratio.
Yesterday, the Wall Street Journal reported that average compensation in 2011 at Goldman Sachs would fall about 10.3% compared to 2010 (assuming steady pay rates in the fourth quarter). But the compensation-to-revenue ratio at Goldman is expected to rise almost 5% in 2011 to 44%, up from 39.3% in 2010, Sorkin noted, citing estimates from CLSA bank analyst Mike Mayo.
Although Goldman’s annual revenue in 2011 is expected to fall over 22% according to Mayo’s estimates, the compensation has obviously not decreased at the same rate.
Sorkin notes another complicating factor in the compensation-to-revenue ratio: many bank revenues were inflated by a debt valuation adjustment—an accounting measure where the value of the debt falls, thus boosting revenue. That inflated revenue figure may mean the actual compensation-to-revenue figure is even higher than estimated.
Each quarter the banks set aside a percentage of revenue for benefit costs. Through the first three quarters of 2011, total compensation and benefit costs at 34 publicly traded financial firms tracked by The Wall Street Journal were on pace for a record-high $172 billion. The calculation is based on the companies’ reported results and projections by analysts.
2011 was a bad year for Wall Street as financial institutions curbed core areas of business, cut over 200,000 jobs and saw their stock value tumble (financials were one of the biggest losers on the S&P 500, falling over 20% year-over-year). Last week, several bank analysts lowered their fourth quarter earning estimates for major financials, most of which are due to report within the next 2 weeks. So in light of falling revenue, it can be argued that Wall Street compensation may not have fallen enough.
Sorkin summed it up as such:
It is an odd Wall Street paradox: in down years, a higher percentage of a firm’s revenue is paid to employees.