Wall Street's Record Bonuses Will Be Bigger Than They Appear

Yesterday, I wrote about how Goldman Sachs, in particular, is set to have an amazing year, which will include record bonuses. Today, the Wall Street Journal reports that the same can be said for the rest of Wall Street: its bonus pool will hit a new all-time record. As amazingly as this indicates banks have done, their employees will do even better.

First, here's the news blurb from WSJ:

Major U.S. banks and securities firms are on pace to pay their employees about $140 billion this year -- a record high that shows compensation is rebounding despite regulatory scrutiny of Wall Street's pay culture.

Workers at 23 top investment banks, hedge funds, asset managers and stock and commodities exchanges can expect to earn even more than they did the peak year of 2007, according to an analysis of securities filings for the first half of 2009 and revenue estimates through year-end by The Wall Street Journal.

Here's that in chart format:

bonuses WSJ 2009-10.gif

But this bit from the Journal doesn't add up:

Total compensation and benefits at the publicly traded firms analyzed by the Journal are on track to increase 20% from last year's $117 billion -- and to top 2007's $130 billion payout. This year, employees at the companies will earn an estimated $143,400 on average, up almost $2,000 from 2007 levels.

According to the numbers given, the bonus pool is increasing by 7.7% from 2007 to 2009. Yet, average bonuses are only increasing by 1.4%. Meanwhile, banks have slashed thousands of jobs. How can this be?

It can't. So I question the validity numbers the WSJ provides. According to the Bureau of Labor Statistics, in September 2007, the unemployment rate for financial services was 4.5%. For September 2009, it was 9.5% -- an increase of 5%. Using a 5% decrease in financial service employees as characteristic of Wall Street (and it's probably a conservative estimate, frankly, as another estimation I did concluded the financial services population shrunk by 6.1%), that means if the bonus pool has increased by 7.7%, then the increase in average bonus size should be around 13.4% -- almost double the pool's increase. That would make the average bonus around $160,300.

I'm not sure how the Wall Street Journal gets its numbers, but both empirical observation and theory suggest that there are far fewer bankers and traders on Wall Street today than in 2007. The population receiving bonuses has certainly shrunk. Clearly, if you split a larger pie over fewer people, they each get a much bigger piece.