Banks Take Care of Their Own, Ignore Shareholders

Bank Pay in 2009

Bank pay has never seemed more out of synch with common sense.

This week, banks have been reporting their compensation for 2009. In many instances, banks are consuming all of their available income (and then some) on compensation. Many banks are spending almost all of their revenue on salaries. It is an incredible statement of disregard for shareholders. For banks that still have TARP funds left to pay back, its even worse. The banks somehow are swallowing their shame. They must have a large appetite.

The table at the top of this entry is a review of the pay for performance paradigm in place at some leading banks. The situation at Morgan Stanley seems to be the most provocative. While banking operations, company-wide did earn a profit in 2009, the executive compensation policy meant that shareholders were shut out of the action.

Eric Dash has a nice review of the situation in the New York Times:

“Even now, after all those big bonus numbers, the pay-to-profit ratio for the financial industry might come as a surprise to many people. The five largest banks on Wall Street — Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley — earned a combined $147.4 billion before paying compensation and taxes last year. They plowed back a combined $31.2 billion into their companies and returned a total of $2.1 billion to shareholders in the form of dividends. They paid $114.1 billion to their employees.”

The madness is all the more maddening because banks spend plenty of time trying to articulate an underlying principle for their compensation schemes.  The gist, repeated through annual reports and 10-k’s as a mantra for the powerful, goes like this: we pay a lot to reward performance.

This year, performance is looking pretty weak. Pay is doing pretty well.