01/21/2012 02:18 pm ET

Wall Street Pay, Declines And All, Remains Sure Bet For Big Money

Payouts declined on Wall Street this year, as the major financial firms tried to steer through several quarters of lawsuits, layoffs, jittery markets, and public opprobrium. Yet the earnings reports of the past several days have mainly served as a reminder that whether times are good or bad, people on Wall Street tend to make a lot of money.

Compensation at Goldman Sachs may be down almost 15 percent from last year, but the firm still had enough to pay its employees an average of $367,057 in salary, bonuses and benefits. Compensation cuts at JPMorgan's investment-banking arm brought down the employee average more than 7.5 percent -- but even so, that average was still $341,552, according to reports. That's almost 10 times greater than the average salary for all American workers, which is just $37,128 a year. And most of those workers aren't at companies that underwent such massive losses just a few years ago that the government had to step in and rescue them.

What's going on? Why do employees in the financial industry get paid so well? At a time when millions of Americans are out of work or barely making ends meet -- thanks to a recession hastened by a financial crisis in which the country's largest banks were central participants -- how is Wall Street able to take home the cash that it does?

This September, when the protesters of Occupy Wall Street first set up camp in lower Manhattan, one of the many messages chalked on the Zuccotti Park sidewalk read, "BANKS CREATE NOTHING." This isn't quite true. The purpose of a financial system is to shift capital around in ways that make the economy grow. Yet in recent years, that function has been less of a priority at many major banks than the generation of enormous in-house profits, mostly through the manipulation of assets already on the books.

Proprietary trading, for instance -- where banks gamble on the direction of markets and instruments using their own money -- is one of the most lucrative pursuits a financial firm can engage in. It's also seen as highly risky, particularly by former Federal Reserve chairman Paul Volcker, who initially devised the so-called Volcker Rule to keep proprietary trading in check, though extensive revision and legislative resistance have put the future of these efforts in question.

Those who study the industry are quick to point out that not all Wall Street pay packages are created equal. As in most other areas of the economy, the people at the top make more than the people in the middle -- sometimes much, much more. This past year, the compensation for highly-placed financial executives was between 50 and 100 times greater than that of the average employee, according to one analysis.

"The financial industry has its own version of the 99 percent and the 1 percent," Michael Mayo, a banking analyst for CLSA, told The Huffington Post. "It's almost a tale of two cities in a way."

At the same time, Wall Street's pay scale remains a stark outlier when compared to the rest of society. In 1981, in New York City, the average worker in the securities industry was making about twice as much as the average employee in any other part of the private sector. By 2010, adjusted for inflation, the average securities salary had soared to more than five times the average salary for all other private workers in the city. During a 30-year period when the incomes of most employees, no matter what their job, hardly grew at all, pay on Wall Street has accelerated dramatically -- even as major financial institutions were making moves that would eventually jeopardize the whole economy.

The comparison to 1981 is illustrative, since it was the administration of Ronald Reagan, inaugurated that year as president, that provided so much momentum to the deregulatory trend that largely characterized the relationship between Washington and big business until the financial crisis.

Reagan dismantled the regulatory framework around the savings and loan industry. Bill Clinton rolled back the Glass-Steagall Act, allowing commercial and investment banks to blend their operations. George W. Bush presided over a bout of largely unmonitored mortgage lending and trading that inflated the economy before puncturing it. These and other instances of retreat from government oversight made it possible for banks to take greater risks with more money, which in turn led to the higher and higher accrual of capital at financial firms.

It's also been argued that measures like the 1998 bailout of the sagging hedge fund Long-Term Capital Management, a rescue effort spearheaded by the Federal Reserve, likely contributed to a sense on Wall Street that it was okay to edge ever further out onto risky limbs, since the government was demonstrably willing to step in if the situation demanded it. Even as bigger gambles were bringing more and more money in, banks were figuring out ways to hold on to more of it, devising strategies to alleviate their tax burdens. Wells Fargo, for example, saved almost $18 billion in tax breaks between 2008 and 2010, and Goldman Sachs paid just 1.1 percent of its 2008 income in taxes.

In recent years, competitive pressure -- the concern that banking employees and executives will simply jump to another company if it offers more impressive pay packages -- has also contributed to a rise in compensation levels. Hedge funds have begun piling new charges on top of their existing management fees. Bonus payouts for financial firm employees, meanwhile, have often borne only a loose relation to those firms' actual yearly performance. While banks haven't been immune to the economic slowdown that took hold in 2008, it's hard to make the argument that they've suffered: Wall Street firms made more in profits during the first 30 months of Barack Obama's presidency than they did during George W. Bush's eight years in office.

People affiliated with the financial industry point out that many Wall Street employees work long hours, cope with enormous pressure, and have relatively little job security. Moreover, jobs at major financial firms usually require skill sets and a level of education that not everyone possesses. It's common to hear the argument that Wall Street pay levels should reflect the demands of the job.

"You have to keep in mind, at the end of the day -- a large, successful professional services firm, its primary assets are its employees," one compensation consultant told The Huffington Post. At the same time, he said, "paying people regardless of performance, which is what you do when you pay them bigger and bigger salaries, is something you have to think about."

Michael Mayo, whose book "Exile On Wall Street" addresses the topic of swollen compensation in the financial industry, was more pointed in his assessment.

When it comes to the social value of what banks do, he told HuffPost, "pay has not been commensurate with the contribution." For senior-level bankers to rake in six- and seven-figure sums while their companies make misstep after misstep, he said, sends the worst possible signal to people in other industries -- not to mention the ordinary American taxpayer who has to watch it all happen.

"The net effect of all that is that the outsiders increasingly perceive the system as rigged," said Mayo. "It dilutes the moral foundation for our capitalistic system."