Why do all investment-bank CEOs make $40m?

$40 million seems to be the going rate for an investment-bank CEO these days. Executive compensation expert Graef Crystal has done the math, and finds that the pay for Lloyd Blankfein of Goldman Sachs; Stanley O'Neal of Merrill Lynch; John Mack of Morgan Stanley; Richard Fuld of Lehman Brothers; and James Cayne of Bear Stearns is definitely converging on pretty much the same point, despite a huge amount of disparity in income and sales.

Crystal smells smoke-filled rooms. And it's not just the CEO pay he's unhappy about, either: he notes that Goldman COOs Gary Cohn and Jon Winkelried, as well as CFO David Viniar, are all making well over $40 million as well. He writes:

It's hard enough for shareholders to digest Blankfein earning just under $60 million last year -- even though his company produced a 52 percent total return level. To learn that Blankfein's two top associates earn within a hair of his pay level, must be annoying in the extreme.

I don't buy it. What's annoying is when a CEO, taking credit for and profit from his employees' work, ends up with a vastly disproportionate part of the company's total profits. That's not happening at Goldman, as is evidenced by the small difference in pay between the CEO and his direct reports.

What's more, Crystal fails to mention that by all accounts some Goldman traders took home $100 million bonuses last year, thereby earning significantly more than the CEO. And in fact it's this that I think explains why the CEO pay at investment banks is bunching.

CEOs aren't fungible: if Cayne left Bear, he couldn't start working easily at Goldman. But traders are fungible in that respect, and indeed get poached on a regular basis by investment banks competing against each other. So there's a real market in traders, and top traders anywhere are liable to pull in more than the CEO.

But CEOs have egos, too – and they're unlikely to want to earn significantly less than employees several levels of management down. So if top traders are getting $50 million bonuses, that in itself is likely to explain the $40 million pay packages for CEOs.

Posted by Felix at 13:06 EST