Evidence of growing inequality in incomes has made the issue of CEO pay a lightning rod for activist investors and Democratic presidential candidates alike. But anyone looking for an explanation of income trends might do better to look at Wall Street than at corporate boardrooms.
Hedge fund managers, investment bankers and other senior executives in the financial services industry have in recent years increased their share of the top 0.1 percent income bracket more than CEOs and other top executives of nonfinancial firms, according to a study by Steven Kaplan and Joshua Rauh, economists at the University of Chicago Graduate School of Business. Financial executives as a group also took home much more in pay than lawyers, professional athletes and celebrities, they say.
Wall Street professionals really stand out at the very top of the scale -- the highest 0.0001 percent of adjusted gross incomes. In 2004 there were nine times as many financial services executives as CEOs of public companies earning in excess of $100 million, the economists say. They estimate that the combined earnings of the top 25 hedge fund managers alone, based on the annual survey by Institutional Investor’s Alpha magazine, was greater than the collective pay of all S&P 500 CEOs.
“CEOs have done well, but not better than people doing similar things,” Kaplan tells II.
The conclusions are not exactly surprising, but the study is illuminating because it attempts to shed light on income groups for which there is little available data.
By drawing on compensation disclosures by the ten largest publicly traded investment banks and discussions with industry insiders, the economists estimate that the ten banks employ roughly 10,000 managing directors, who collectively earned somewhere between $19 billion and $28 billion in 2004. That accounted for 5.8 percent to 11.2 percent of all income earned by the top 0.01 percent pay bracket in that year, which was roughly equivalent to the share of top executives of all nonfinancial firms, they say.
The economists also estimate that partners at the top 100 law firms represented 2.4 percent of the top 0.1 percent income bracket in 2004, professional athletes 0.8 percent, and celebrities a smaller, undetermined amount. The study doesn’t include other wealthy groups such as trial lawyers, executives of privately held companies, top doctors and independently wealthy individuals, for which data is even harder to obtain.
As to why Wall Street is faring so well, the economists have a simple answer: Follow the money. “With the huge improvements in information technology and the substantial increase in the value of securities markets over the past 25 years, asset managers, investment bankers, lawyers and top executives can now apply their talent to much larger pools of money,” the study notes.
The same answer, of course, explains why Congress is devoting so much attention to the hedge fund and private equity crowd.
