A salary survey...from the real world

Back in January 2009, we published a post entitled "The Bonus Debate: Investment Banker or Heart Surgeon".  Our target was the compensation structure of the investment banking industry - and pretty much the same applies in the world of hedge funds.

As we said at the time:

"It is not hard to agree that one of the primary causes of the global economy's rollercoaster ride from excess to catastrophe has been compensation.  We have commented before on the many inconsistencies of hedge fund compensation and the fundamental weaknesses of the "2 and 20" structure.  Indeed, Castle Hall's White Paper, "Hedge Fund Investing in a New World", discussed these issues in October 2008.

Another compensation issue is, of course, the pay structure in the world of Wall Street's investment banks. According to Bloomberg today, "Wall Street bonuses may go the way of the dodo" and, yesterday, President Obama was widely reported as saying that the $18 billion bonus pool Wall Street paid itself at the end of 2008 was "shameful".

And yes, Wall Street's bonuses are shameful.  Particularly, they are asymmetric: you get paid on the way up but have no obligation to pay anything back on the way down.  It's like a balloon blowing contest where the person who blows the biggest balloon gets paid the most, but doesn't have to repay anything if it bursts a moment later.

What is really shameful - and what really is the root problem here - is the finance industry's sense of entitlement.  Progressively, it would seem that those working at the top of the finance "system", including many investment bankers and hedge fund managers, have developed their own value system, and their own, ever more inflated baseline for "normal" compensation.  Never has the gap between the psychology of Wall Street and Main Street been so wide.  

Hedge fund investment professionals, just like investment bankers, need to remember that $500,000 a year - let alone $5 million - is not a threshold level of "acceptable" compensation.  It is also the case that the compensation you make in your best year is not your baseline minimum for what you expect to get next time - a bonus may well be a highly generous recognition of being fortuitously in the right place at the right time."

Against this background, we have been amused to read about Mr. Andrew Hall, the Phibro commodity trader who has a contractually bomb proof potential $100 million pay packet.  Yet, on CNN this evening, there is a list of "top paying jobs": per CNN - "what other great careers from CNN Money's and payscale.com's list of Best Jobs in America offer great paychecks?"

The list is as follows:

1. Anesthesiologist: Median Salary $292,000, Best Salary $408,000

2. Physician/Obstetrician/Gynecologist: Median Salary $222,000, Best Salary $338,000

3. Psychiatrist: Median Salary, $177,000, Best Salary $279,000

4. Nurse Anesthetist: Median Salary,  $157,000, Best Salary $214,000

5. Sales Director: Median Salary, $140,000, Best Salary $239,000

6. Actuary: Median Salary, $129,000, Best Salary $257,000

7. Finance Director: Median Salary, $121,000, Best Salary $214,000

8. Software Architect: Median Salary, $117,000, Best Salary $166,000

9: Attorney / Lawyer: Median Salary, $115,000, Best Salary $262,000

10: Insurance Broker: Median Salary, $114,000, Best Salary $273,000

To put all this in perspective, if you were a stellar commodity trader with compensation of $100 million per year, you would earn the annual salary of the median anesthesiologist in roughly 5.5 hours.  So, arrive at work at 8:30 on January 1, you're done by 2pm.

As we said earlier this year, never has the gap between Main Street and Wall Street (or in this case a nice farmhouse in Connecticut) been so wide.

www.castlehallalternatives.com

Hedge Fund Operational Due Diligence

Comments

[Highgamma]

Packages of the size of the Phibro package are really forms of ownership without giving up control. Citi has ceded much of the economic profit of the entity to Mr. Hall, yet Citi retains the control that comes with complete legal ownership.

If you took into account people in the professions above that own a firm (such as a physician that has ownership interest in a medical firm), I think you'd get a different answer. It's just not a good characterization of Mr. Hall to compare him to purely salaried workers.