According to a report by the New York State comptroller, Wall Street bonuses rose 17% in 2009, topping $20 billion dollars. While those figures may be galling in an environment in which businesses and individuals continue to deal with the consequences of the credit crisis, they are two more data point to illustrate a long-standing phenomenon -- one that investors in securities firms can't afford to ignore.
Bankers' compensation outruns owners' returns
At the large investment banks, compensation growth far outpaced disappointing shareholder returns over the past decade:
Company |
10-Year Annualized Growth Rate of Compensation & Benefits |
10-Year Annualized Total Stock Return to Dec. 31, 2009 |
---|---|---|
Goldman Sachs |
15% |
6.9% |
Morgan Stanley |
7.7% |
(4.9%) |
JPMorgan Chase |
10.9% |
1.2% |
Source: Capital IQ, a division of Standard & Poor's.
Sure, the broad market's performance from 2000 through 2009 was awful, too, but compensation growth at "franchise" businesses operating in other industries was better contained (I use selling, general, and administrative expenses in the following table; it's the best proxy for compensation expense, which isn't broken out for non-financials):
Company |
10-Year Annualized Growth Rate of Selling, General, and Administrative Expense |
10-Year Annualized Total Stock Return to Dec. 31, 2009 |
---|---|---|
American Express |
0.7% |
(0.6%) |
Johnson & Johnson |
6.3% |
5.4% |
Procter & Gamble |
7.8% |
3.4% |
Coca-Cola |
3% |
2.2% |
Source: Capital IQ, a division of Standard & Poor's.
Inside shareholders, outside shareholders
The disparity observed at investment banks between what employees are taking home and what is left for shareholders was at the crux of my answer to the question, is Goldman a buy?. I have written it before, and I'll repeat it here: Securities firms are not run for the benefit of outside shareholders; they are run for the benefit of "inside" shareholders (i.e., the employee-shareholders), who accrue a disproportionate amount of the wealth these firms create.
You don't need to take my word for it -- listen to one of the insiders instead. Leon Cooperman, a former Goldman general partner who now runs Omega Advisors, a very successful hedge fund, says, "We are not an investor in that space [investment banks]. I determined many years ago that if you want to make money on Wall Street, you work there; you don't invest there. They just pay themselves too well."
Margin of safety is your only protection
Investors who choose to disregard this warning are swimming against a strong tide and should require an extraordinary margin of safety to do so.
Looking for "franchise" businesses that do reward their shareholders? Tim Hanson has got six stock ideas for you.