Preemptive greed baiting

Posted by Marc Hodak on October 25, 2008 under Executive compensation | 2 Comments to Read

I’d like to know what an “AP review” means. When I did a review of likely bonuses for a Forbes story last week, I predicted that Wall Street bonuses would be down by 30 to 50 percent. The Associated Press claims that “despite the Wall Street meltdown, the nation’s biggest banks are preparing to pay their workers as much as last year or more.”

What did the AP see that led them to this bold prediction? An “AP review” revealed that “total costs for salaries, benefits and bonuses grow by an average of 3 percent from a year ago.” They presented this to Andrew Cuomo, New York’s AG (Aspiring Governor), who summoned the outrage appropriate to an elected official:

Taxpayers have lost their life savings, and now they are being asked to bail out corporations. It’s adding insult to injury to continue to pay outsized bonuses and exorbitant compensation.

What was the AP review, and subsequent Cuomo comments based on? The pay expenses disclosed by the banks in their quarterly reports.

Uh huh.

Let’s take a quick look at the numerical example they give.

At Citigroup, which has cut 23,000 jobs this year amid the crisis, pay expenses for the first nine months of this year came to $25.9 billion, 4 percent more than the same period last year.

Folks, this line item called “Compensation and benefits” is very big. It covers all of Citigroup’s 370,000+ employees. On average, it comes to about $90,000 per employee, which is something like $60,000 in salary, and $30,000 in benefits and bonuses. The top earners, a couple thousand people, obviously got quite a bit more than that last year, but all their bonuses maybe added up to about $2 billion. If that were cut in half, the cost reduction would easily be negated by additional costs associated with the 23,000 layoffs Citi has announced.

If I were an analyst, I would dig a little deeper and see what Citi was saying specifically about incentive compensation. For instance, in their most recent disclosure, from which the $25.9 billion figure came from, what do they mean by, “Expenses declined for the third consecutive quarter, due to lower incentive compensation accruals?” And what did they mean in the section on the Securities and Banking Group that, “Expenses grew 21%, driven by a significant downward adjustment to incentive compensation in the prior-year period?”

If I were an analyst, I would wonder whether that “downward adjustment” was part of the $500 million reduction in prior-year compensation expenses versus what was reported last year. $500 million sounds like a pretty big number, especially if it represented a reduction concentrated on a couple thousand high commission folks. I don’t know what these numbers actually mean. As an analyst, I would want to find out before blowing off about how bonuses will be the same this year as last.

Of course, if I were an AP writer, instead of an analyst, I would interview whoever would be willing to be quoted, whether they knew what they were talking about or not, and write a story that solicited outrage from people in high places. Then I could feel like I’m somehow “making a difference” instead of providing useful information that increased the amount of real knowledge in society.

My favorite quote in the article: “Already, lawmakers are doing all they can to shame the banks out of paying anything.”

There you go. People without shame trying to shame others. The story of Congress in a nutshell.