12/18/2006 02:54 pm ET Updated Dec 06, 2017

The Other Side of the Coin: Wall Street Bonus Billions are Fair!

My recent "nose against the glass window" post over the weekend, Richie Rich: When a Two Million Dollar Xmas Bonus is Chump Change, provoked a response that I did not expect.

My post talked about how Morgan Stanley gave its chief a $40 million bonus for 2006.

And how Morgan was just playing catch-up with Goldman Sachs, which is giving bonuses of more than $100 million to several of its top traders - out of a record $16 billion total bonus pot. This figure averages out to $622,000 for every one of their 26,400 employees, including: messengers, clerks, junior accountants, secretaries, copy people and maintenance men.

Secretaries, a few years out of Katherine Gibbs, are getting $200,000 to $300,000 from their bosses.

Hey, what does it matter? If you are a senior partner with a $25 million bonus check, and you are asking your office-wife to fill out the deposit slip...wouldn't it seem kind of chintzy not to toss a couple of hundred-grand chips her way? One percent?

Then there is always the doom and gloom crowd. And most of the rest of us are seething with jealousy. It is not fair....of course.

"They are parasites. These people don't make anything...It's all out of the realm of ordinary lives."

The above comment was thrown in to protect myself from possible assault from the left wing populists who rage against "economic inequality", the rich and their unproductive lives. Economic inequality and our Winner Take All economy are real problems.

But there are no easy, quick solutions. These angry protectionists argue against Free Trade Agreements and globalization and basically parrot strong labor union protectionist's arguments.

They paint everything as black and white, and seek to highlight divisions in the Democratic Party. They accuse Bill Clinton of selling out the American worker, and rail against such liberal stalwarts as Barack Obama, Barney Frank, Chuck Schumer, John Kerry, Evan Bayh, Chris Dodd, Hillary Clinton and even Charlie Rangel.

They talk about the Money Party and the People's Party and yearn for economies of old that depend on a manufacturing heartland. They live with the hope that the new Democratic congress can miraculously pass laws to right inevitable economic changes. They want to build a Wall Around America and hope that the good times and big, powerful unions will miraculously return to save the lost, rust-belt jobs that have seeped away over the last five decades.

These labor union populists capitalize on the seething anger of Midwest unemployment and the misery that globalization has wrought.

But I didn't expect much of an attack from the other side. A friend of mine, who works in financial services, accused me of hyperbole and responded to me privately with the following:

"It's precisely responses like the ones that you've sent me that prove how dangerous it is to send out such one-sided and grossly exaggerated write ups.

When people read about the compensation packages at Goldman, they want to believe the worst. It makes it easier to be who you are, if you believe that those making more money are somehow unworthy or unscrupulous.

It's like saying the women in Salem, Mass. must have been witches because so many people believed the evidence. Do you need the hundreds of examples in history of human envy, greed or other vices leading to widespread misjudgment and unfair opinion?

Is Wall Street compensation out of control? Most likely so. So is compensation in so many other areas. Wall Street managers do not pay one dime more than they have to pay, in order to keep the producers that they must keep ... to grow revenue.

Those producers who can take revenue away to another firm must be paid close to or the same as the competition will pay. Sometimes, producers get underpaid and they leave. Direct producers (the Indians) get 5% to 12% of their gross revenue, on average. Their managers get 3% to 5%, and the more senior mangers 1% to 2% and the heads of the group much less than that... do the math. What is Mack's pay as a percent of Morgan Stanley's gross or net income?

The truth is that the people who are not able to generate "Alpha" are paid below these norms and are deemed replaceable. Many, many Ivy grads and math PhDs never get to the "two comma" compensation league. Yet to read your blog, it would appear as inevitable as standing on an escalator. That, of course, is what everyone wants to believe. Get your uncle/cousin/Frat Mate/etc. to help you get a job on Wall Street and you are set for life. Of course, the commonly held corollary to this is that you must relinquish your ethics upon getting the job.

There are enough examples of the above to fuel the fire and create a fever of 'burn the witch' mania. With a thread of truth to use as a base, it is easy to weave a whole cloth which grossly mis-generalizes an industry and at the same time panders to basely held beliefs.

So what am I saying, are people on Wall Street paid "too much"? Maybe. But unless we place salary caps on income, there is an open auction out there and salaries will go up and down based on demand. The same is true for actors, sport stars, etc. The salaries they earn are not based on intellectual or physical wattage expended in the transmission of their tasks. Rather, their income is based on the marginal revenue to the equity holders in the movie studios or sports franchises for paying up to get the best.

Shareholders at Goldman Sachs (including pension and mutual funds) have earned more dividends and seen their stock go higher because Goldman has the best traders. If you put a cap on their compensation structure because the numbers don't sit well with the general population, then the shareholders will suffer.

Regarding the comment below, I too think that Wall Street has seen its apogee in earnings. Margins will decrease and many of my colleagues on the trading floor will be replaced by electronic exchanges.

No doubt. We are flying closer to the sun and the wax is melting off the wings. In part, it is that risk that makes the rewards necessary."