Pay in the private equity industry is on the rise. As is always the case in a highly competitive, human capital intensive industry, the question is: pay is on the rise for who?
Looking at Some Broad Pay Issues
Consider, for instance, the situation of Blackstone CEO Stephen Schwartzman. His annual base pay is $350,000, and it hasn’t changed since Blackstone’s initial public offering in 2007. The tale of flat base salary is quite common in modern day finance, at least among individuals responsible for running financial firms.
What’s more interesting than the flat base salary is the enormous growth in bonus pay. Mr. Schwartzman’s total compensation in 2014, which includes an annual bonus, dividends, and equity incentives, is at about $690 million, and may reach more than $1 billion by the end of the year. Not bad for a guy who has a base salary of a mere $350,000.
Hollowing Out of the “Middle Class” in Finance?
The story of Mr. Schwartzman is something that’s becoming increasingly commonplace in the financial industry. Pay is shifting towards incentives, and the individuals benefiting from such a switch are head honchos and young Wall Street talent.
The middle group -well, they might be in trouble.
Pre and Post Crisis Pay
Here’s a look at New York City wages from 2007 to 2014.
As indicated, 2014 post-crisis pay in the Securities sector is still below where it was in 2007, down from $436,792 to $426,149. Interestingly, although not surprising, pay in the “All Other” category is up, from $70,783 to $73,313.
Why is the securities industry lagging, or is it?
The answer, according to compensation experts, is that pay in the securities industry is undergoing a transformation. Instead of paying employees a flat annual salary, Wall Street firms are shifting more pay towards cash bonuses, and this shift benefits the higher-ups and the newly hired.
Equity-based Deferred Compensation
In addition to using cash bonuses to attract talent and reward top performers, Wall Street’s top brass also have a greater share of their compensation coming from equity-based deferred compensation.
This equity-based deferred compensation is what makes Mr. Schwartzman so much money as well as other top Wall Street CEOs. Their six or seven figure salaries can easily shift to 8 or even 9 figures when performance based pay (i.e. equity-based deferred compensation) has value.
Other Shifting
In addition to a shift to cash bonuses and equity-based deferred compensation, Wall Street is also looking for younger talent and talent outside of the New York area. Wall Street firms are also letting mid-level employees go in an effort to boost profitability.
Conclusion
Perhaps unsurprisingly given the increasing mobility of labor and firms willing to outsource labor to lower cost areas, there’s a growing gap between the lower paid private equity industry employees and the higher level employees.
Part of the shift can be explained by outsourcing and downsizing. Part of the shift is also due to a shift towards cash bonuses and equity-based deferred compensation.
There is also no indication that the gap will be narrowing any time soon.
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