Wall Street Over Compensation?
Out of curiosity I took a quick look at how much Net Revenue is generated by an individual employee across GS, MS, Google, and Apple.
--GS net revenue per employee is about ~50% lower than google and ~40% lower than apple.
--MS net revenue per employee is about ~30% lower than google and ~20% lower than apple.
Most recent quarter net revenues were annualized and compared to total employees -- full-time, temps, part-time. Net interest income was included for GS and MS, and excluded for Google and Apple (non-operating, not truly driven by employees).
Without numbers in hand one could guess avg. compensation is likely higher @ GS and MS vs tech firms, and that equity represents a bigger portion of tech compensation. Surely the simplified methods above are fraught with over-simplification (asset light vs asset heavy, growth vs. mature, geographic, heavy regulation vs. light regulation, multi-level distribution vs. people-light distribution, etc etc etc) but it does point to inflated expectations vs. actual returns delivered by an employee across two industries attracting similar talent pools.
This is nothing new, but what builds compensations expectations for the industry as a whole? Clearly it is not returns delivered to equity investors. Is there a vacuum between compensation expectations and the actual returns provided by FI stocks?
Ultimately one wonders whether the financial services industry is ripe for activist value investors to disrupt the relative value destruction being propagated. There is little impetus as an equity investor to lease long-term capital at the holdco level to these conglomerates, especially compared to prevailing alternatives. Employees at large iBanks complain about being given stock, given their limited ability to influence the stock price -- if this is the case then the firms maybe are too big.
So what happens next?
(A) Either layoffs occur to drive net revenue per employee to more efficient results
(B) Compensation spend per employee decreases to a level that equalizes relative risk-adjusted value generated by the avg. employee to levels similar to other industries (tech doesn't have to be the ultimate goal, but certainly a noble target)
(C) Net revenue is driven upwards. This one is hard to do for FIs in a leverage constrained environment using the traditional revenue sources. Growth will in fact have to be driven by new product development and innovation that uses NO-to-very little capital (clearly not referring to structured products and/or financial engineering and/or other balance sheet intensive activities).
(D) Spin-offs occur. Each line of business is turned into a standalone operating entity, focusing its human and financial capital on its specific opportunities. Shared-services, non-revenue generating employees are minimized. Scale advantages are re-created with bi-lateral agreements between entities.
It feels like FIs have been managed for the employees, not for the equity investors. I bet this will change. I'm bullish and a net buyer of these stocks if the above changes are made.
As an employee you prob want to be in a firm, industry, context where you are driving equity value.
Nice find. Were these numbers just from 2011?
great post, but can you really make this comparison ? If you go to google's website and look at divisions, you see Admin, business ops & development, software engineering, etc. You can essentially find an equal counterpart for each of these divisions in finance firms in what we characterize as Back office ( for example software eng can come under technology) and in addition to this, finance firms have what we call front office which generate actual revenue so adding both FO and BO to the total employee count for FIs i think set ups and unequal comp...I think if you really want to make this comp you would have to compare revenue generating vs revenue generating for both firms, but I think this may be hard to do for tech firms.
unknown4ever, yes you can and your analysis of google's labor force is wrong. The core of Google and Apple employees, everything except minimal corporate G&A, is focused on the creation, execution, management, and sale/distribution of products, be they online advertising solutions (google) or consumer hardware (apple). Your simplification of FO and BO within a BHC/IB is accurate but incomplete as it doesn't consider risk / middle office, and the categorization of revenue-facing activities and non-revenue facing activties within non-IB divisions, like PB/AM, or non-customer facing but yet revenue-generating activities like the corporate treasury portfolio. Trust me - much more complex than concepts used to prep for 1st round interviews where the world is merely FO and BO!
It was conceded in the post "Surely the simplified methods above are fraught with over-simplification (asset light vs asset heavy, growth vs. mature, geographic, heavy regulation vs. light regulation, multi-level distribution vs. people-light distribution, etc etc etc) but it does point to inflated expectations vs. actual returns delivered by an employee across two industries attracting similar talent pools."
Yet reality still stands. As consolidated firms, each of these 4 companies is responsible for maximizing the ratio of revenue generating activities vs. cost-centers. Cost centers enable revenue-generating activities, so comparing merely revenue-generating to its counterpart in other industries is a fallacy as the entire machine generates revenue, the salesperson does not structure new securities, the banker and cap markets does, he doesn't price risk the trader does, the trader doesn't really contribute to the management of the divisional portfolio - risk mgmt does, and risk doesn't manage the liquidity profile of the entire bank, the CFO office does. You understand now what is meant by "the entire machine generates revenue"... But that's not really the point either.
The point is simple. There is a cultural disconnect between compensation expected by employees and risk-adjusted equity returns generated by these firms. This cultural disconnect is massive with entry-level ranks. The disconnect is less present in other industries. Overall If employees, be senior or jr, feel individually disconnected and think their own activities aren't driving the stock, then it means the firms are too big. These firms are ripe for some serious activism.
Nice find yes.
Well we all new that compensation was extremely high in IBs and only recently do we see compensation drop.
Looking at your options, i think A and D (layoffs and spin-offs) will occur. The lay-offs we have seen (RBS recently comes to mind) and I think we will continue to see them for a while. And there have been talks about the spin-offs as well due to new regulations.
Question is what are the main industries that are driven on equity value and how does compensation compare?
This is not a relevant comparison. Apple and Google sell products, GS and MS sell services. At I-banks, employees are pretty much the only revenue generating assets at the firm, so all revenue is attributable to employees. At Apple and Google they have other assets that produce revenue, namely the products they make and sell.
One way to think of it is what is the marginal revenue product of employees at these two types of firms. The MRP of i-bank employees is higher for the reason listed above. The MRP of people at Apple is lower because revenue must be earned from non-employee sources.
You're wrong, in the end both sets of firms sell product solutions, Google more services than Apple. FIs sell products - not only services. Read my post the comparison is not necessarily the point.
The point is the decoupling between compensation ppl expect and the actual equity value they create/destroy. This cultural disconnect is unique and not equity shareholder friendly. That was the whole point of the post. What are your thoughts.
If your point is that compensation expectations and shareholder interests are not congruent I can buy that. I still do not think your comparison is appropriate and that squawk makes a legitimate point.
More generally though, I think this is an interesting problem in that there is really no reason advisory businesses should be publicly owned. IBD is not a capital intensive business (even most underwriting is only done on a 'best efforts' basis), so there is no need to raise public funds for IBD. Given the shareholder pressure you mention, along with increased regulatory scrutiny on trading and investing activities, I see it as reasonably plausible that IBD businesses of banks are spun off or taken private in the coming years.
I disagree completely with the OP.
If Google or Apple loses all of their core employees tomorrow, they could still go on selling ads and iPhones. They would not innovate as fast, but they would eventually refill the ranks. They don't need today's engineers to sell what they've already invented.
On the other hand, if any i-bank loses its top-traders and/or dealmakers tomorrow, revenue will come to a grinding HALT.
Therefore, the natural business model of banks will be driven toward generous compensation, otherwise the firm stops generating revenue, period.
As a result, publicly-traded i-banks are never going to be able enjoy healthy operating leverage. There are certainly other sectors to invest in with much more attractive business models for the equity investor.
Is it over the main point - the decoupling between compensation ppl expect and the actual equity value they create/destroy. This cultural disconnect is unique and not equity shareholder friendly. That was the whole point of the post. Focus on that.
a) Why on Earth would you look at Rev/Employee for a large Investment Bank. BO/MO usually make up over half of the employee count.
b) Google + Apple --> majority employees probably engineers
Large Investment bank stocks have been awful investments for external equity holders. In bad years, they crumble due to over-leverage. In good years, they will either pay out big comp in form of cash or RSUs/Options. Either way, they're terrible investments. Even the boutiques have come fire. Have you seen Greenhill over the last year?
I guess my point is, why would you invest somewhere where all the incentives are stacked against you? Do you see Warren Buffett with direct EQUITY (not convertible) stakes in any Investment Banks? Wells Fargo is majority commercial.
Wow, interesting find
Squawk is right. Service based businesses require employees in a way that manufacturing companies do not. Additionally, cartel-like behavior (ie: minimal price competition) has allowed investment banks to further influence compensation. We'll see if this can hold up as revenues continue to fall.
squawk if dealmakers and traders are fired you can still execute on the pipeline of deals and wind-down market making books, it's a similar concept in tech firms providing actual consumer goods + services (ipad + itunes) or online services (google adwords).
The linking of compensation to firm-wide equity returns is important. If individual employees feel they cannot drive the stock, then shrink the firm or spinoff units so they can more directly drive value.
"prior to 2010"
obviously this is an argument that looks forward, in a leverage constrained environment.
Squawks argument was that IBs "have been awful investments," I was pointing out that was simply not true.
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