The Massive PIMCO Bonus Pool: Thinking About Investment Fees

Santa Fe, NM:  Zapcar Zebra 11/13/14
Santa Fe, NM: Zapcar Zebra 11/13/14

MEGO Alert:  My Eyes Glaze Over having heard about executives’ comp in financial services ever since the Reagan-Bush leveraged-buy-out boom, as probably do yours.  So be warned: numbers below.

But for once, they’re not abstractions in a South Hampton Monopoly game reported in the New York Observer.  They signify something important.

***

           A joke – older even than I – has a client hoisting a couple on the porch of his broker’s yacht club.

‘There’s Bill’s 60 footer.  He’s at Morgan Stanley,’ the broker chirped.  ‘And look at Sean’s 72 footer.  He’s at Merrill…..’

This went on for a bit longer than the client could stomach.  As he stood to leave, he interrupted, ‘So, where’re the customers’ yachts?

***

          Via Felix Salmon (on Medium.com), I learnt of Barry Ritholz’s Friday Bloomberg View story on the $1.5 billion bonus pool for PIMCO’s top managers during Bill Gross’s last full year, 2013.

Ritholtz reports:

…the numbers break down like this: Gross earned $290 million as his year-end bonus for 2013.  Mohamed El-Erian, Pimco’s former chief executive officer and one-time heir apparent to Gross, received $230 million….

 …Former deputy chief investment officer Daniel Ivascyn — now serving as Gross’s replacement as Pimco’s chief investment officer — took home a $70 million bonus. Wendy W. Cupps, the global head of product management, garnered $50 million, making her one of the highest-paid woman in finance….  Douglas Hodge, now the CEO, took home $45 million…. These giant bonuses almost make the $22 million awarded to Pimco’s president, Jay Jacobs, seem puny.

           Ritholz takes the usual swipe at the magnitude of the PIMCO bonuses, but he has other, more important things in mind.

For one, Pimco has been part of a publicly traded company — Allianz — for the past 15 years. Unbeknownst to Allianz’s shareholders, employees of one of its business units have been paying themselves these extraordinarily large sums of money.

In the U.S., it is hard to imagine $1.5 billion in spending on anything not being disclosed. Almost 16 percent of Pimco’s revenue is a “material” amount of money that would normally require disclosure in the U.S. But Allianz is a German company, subject to different regulations.

 …Pimco investors represent pension funds, foundations, charitable trusts, 401ks and other retirement accounts. Pimco’s enormous, self-paid bonuses come right off of the top of the returns those outside investors might otherwise receive.

 So much for the customers’ canoes!

***

           Ritholz credits Felix Salmon with trying to suss out the PIMCO comp numbers in 2012.  Relying on a press report estimating PIMCO’s 30 top execs had taken home an average of $33 million, Salmon made some simple calculations.:

A Pimco spokesman denied Salmon’s claim, responding that “The numbers cited in your blog post today are wildly inaccurate.”

Salmon’s speculation was, indeed, wildly inaccurate — to the downside.

           Salmon’s Nov. 14 Medium blog, ‘Annals of Income Inequality, PIMCO Edition’, asks different questions than Ritholz’s column:

 …the top two highest-paid employees, Gross and El-Erian, made $520 million between them. They’re 3% of the managing directors and 0.3% of the firm’s investment professionals, but they got 35% of the bonus pool.

 …[Why] is Pimco’s salary distribution so skewed? …[Pimco’s] managing directors get to keep 30% of all the firm’s profits. But once they get that money, the way that they distribute it is up to them.

 They could … divert a chunk of it to the other 690 investment professionals, or even give nice bonuses to the 2,000 employees more generally. A $1.5 billion bonus pool split between 2,000 people works out to three quarters of a million dollars per person: we’re talking real money, here.

           So what explains PIMCO’s bonus pool distribution?  Rightly, I think, Salmon responds:

There are only two real explanations … and they’re related. The first is that extreme levels of inequality are, as Thomas Piketty says, the natural order of things. The rich get richer, inequality generally grows rather than shrinks….

 And then the second explanation is old-fashioned greed. The people at the top control the distribution, and take as much as they can for themselves.

 No senior executive will admit to such a motive, of course – but it has to be said that distributions like this one are entirely consistent with it, and are quite common, especially in buy-side financial institutions like Pimco, or hedge funds, or private-equity funds. Maybe, in a sense, it would be more surprising if a place like Pimco was not governed by greed.

 ***

           Like most investment industry types, I’ve heard complaints from managers about their clients’ fee sensitivities – ridiculed invariably as if they were unmanly (regardless of the sex of the manager).

Their could be no complaint, except from the poop deck, were Baby Boomers’ 401Ks dreadnoughts on the high seas of old age.  But aspiring retirees or, more likely, involuntary workforce leavers find themselves on rafts in rocky rapids with no pole or paddle.

Unlike selling forbidden drugs, greed isn’t a victimless vice.  Its essence is, like swindling, personal.  Think Bernie Madoff, though as the PIMCO numbers imply, legitimate greed offers better retirement prospects.

***

Yes, as more than one wise person has said, financial services today is all about fees – whether for investment products, banking services, student loans….  But that wisdom, I take in more than one way.

First, one has to examine every investment, every company offering investment products, for its stated and hidden fees.

More importantly, one must look at these fees for their social and political meanings.  For that reason,Thomas Piketty’s Capital in the Twenty-First Century may be the most important analysis of our era.

But none of this knowledge means much so long as the wise in investment committees natter about fees but continue to pay them without understanding what they are and what they advance.

One need ask no further about the customers’ yachts – or lifeboats.

One Comment

  1. Thank you Peter! This stuff needs to be published, got out there! We’re just scratching the surface here of the excesses still manifest, long after the Banking Crisis is over (0r so we think).
    Brother George

    November 19, 2014
    Reply

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