The Unemployed Life

Out on the Street: Comp Me

Each week, “Joe the Trader” chronicles his experiences with life after Wall Street.

Last week I had my third interview with my most promising job prospect. While I may have to go through another round of pleasantries, at least as far as I’m concerned, it is time to fish or to cut bait. Fortunately, the chief investment officer of the firm was the one to bring up the touchy topic of pay.

“Lets talk comp,” he said. “What are your thoughts?”

What are my thoughts? Are you kidding me? Just give me a job and a reasonable salary. But of course, I couldn’t sound desperate. A few years back, when times were good and I was being lured away by a prospective employer, my dad advised me to “ask for enough to make them squirm.” While that might have been the appropriate strategy at that time, now I am not exactly playing with the strongest hand—nor with the house’s money. So I decided to try to balance the two.

“Well I’m not sure what this job should pay in 2009 dollars,” I said. “I didn’t get a bonus in 2008. [Translation: I took a big, big paycut.] In 2007 I was paid X, in 2006 I was paid 2X. On the other hand, I have three kids and an ex-wife so I need Y [a fraction of X] to live.”

The gap between the 2006 payout and my subsistence wage is wide enough to drive a Mack truck through. Fortunately, he seemed to appreciate the honest answer and there appears to be reasonable middle ground if we progress. Fingers crossed we’ll progress—but not just because of the money. Don’t get me wrong; I need to earn a salary, but I also actually liked my job. I felt lucky to have landed in a career that was stimulating and paid well.

That conversation got me thinking—again—about the pay structure on Wall Street. It is a complicated topic, to be sure, and compensation has come under fire for good reason. Most of the criticism has been targeted at C.E.O.s and very high-level executives, but the structure that paid the big dogs also applied to the rank and file.

In simple terms, the goal is to reward top work and differentiate between producers and dead wood. So generally, employees have a relatively low salary; the variable “bonus” is designed to recognize performance. All of which sounds well and good.

The structural problem is in the execution and wrong-way incentives. The annual pay cycle has often proven to be shorter than the investment horizon. So an employee could invest the firm’s capital in a longer-term asset that performed well for several years before blowing up. Along the way, the employee got paid well despite the ultimate disaster. In addition, key decision makers were encouraged to have big bets; the payouts could be enormous—enough to make up for the downside, losing your job if you’re wrong. I knew this. Every trader knew this. Indeed, it was a joke in many Wall Street circles that if you lost your job as a trader it was better to blow up big, because at least that showed a) you had balls and b) the bank/fund trusted you to take big positions.

The problem from the perspective of many of my Wall Street friends is that they were far away from the decision making that got firms in trouble. They didn’t make subprime loans or sell insurance on AIG. Their salaries are relatively low and most likely wouldn’t finance their lifestyles; they’re understandably distraught that they may lose all of their bonuses directly or through retroactive taxation. I am sure complaints about a $125,000-a-year salary will fall on deaf ears throughout much of the nation, but what should be the going rate be for a 15-year professional with an advanced degree who is willing to work 12- to 14-hour days in New York?

But the real problem, in my opinion, is that many Wall Street professionals want to have it both ways. They cite individual performance to justify rich payouts when things go right, but are quick to cry low salary and It Wasn’t Me in the bad times. One of the reasons people were paid so well in the boom was because there was the option of not being paid well in the lean times. Everyone knew the rules of the game. So it is shocking that some institutions on government life support still paid out bonuses. Somehow the sense of collectiveness disappeared. What happened to the idea that “I work for a company, we are in this together?” Did this individualistic, hyper-performance-based pay system erode that concept?

As I am writing, I can’t help but think why compensation discussions are so all-consuming on Wall Street. (This was true even before the crisis.) The concern about losing the best and brightest because they will no longer be paid extremely well is overdone. Why is this conversation just about the money? What happened to doing a job because you like it? Hopefully there are enough people who spend the majority of their waking hours at their jobs because they actually enjoy what they do.

Going forward it’s pretty clear that the bonus payouts are going to be considerably less. Banks have dialed down risk aggressively, and will do so for some time, so the ability to make the megabucks is more constrained. And the structural faults in the compensation system have been shown. To me, at least, it seems pretty clear that the current system is untenable, but on the other hand I am equally sure that current salaries are too low relative to the quality of many financial professionals. The model is broken and people are going to have to accept a less leveraged compensation structure and will have to hope for a high salary. Now…just try selling a higher salary to Congress.

Joe the Trader spent 11 years as a proprietary trader at a major U.S. bank. He has three children and currently lives in Brooklyn. You can read more of his columns here.

Tags: compensation, greed, Out on the Street, Spending and Saving, Wall Street