Exchange Rates

Are U.S. stock-exchange executives grossly overpaid?

Despite another year of record profits, market highs, and gigantic impending bonuses, all is not well on Wall Street. In the past year, many of the world’s largest initial public offerings (mostly of Chinese and Russian companies) have taken place in London and Hong Kong. Concern over Wall Street’s lack of competitiveness in the emerging global financial marketplace has been building since this spring. Early this month, New York City Mayor Michael Bloomberg and New York Sen. Charles Schumer penned an op-ed fretting that New York’s status as a financial capital was at risk because of excessive litigation and regulation. Treasury Secretary Henry Paulson last week spoke of how excessive litigation and regulation may be scaring firms away from the United States. The Committee on Capital Markets Regulation, co-chaired by Columbia Business School Dean (and former Bush economic adviser) Glenn Hubbard and Brookings Institution Chairman (and former Goldman Sachs President) John Thornton, issued its interim report today, and guess what? It concludes that Wall Street is threatened by … excessive litigation and regulation.

But what about Wall Street’s comparatively high operating costs—many of which have nothing to do with litigation or regulation? These are not mentioned in Paulson’s speeches or the Hubbard-Thornton Committee report. Wall Street has taught companies all over the world to make the most effective use of capital, labor, and raw materials, to refinance debt at the drop of a hat, and to scour the globe for the cheapest supplies of good and services. Wall Street expects its clients and customers to seek efficiency always—except when it comes to its own services.

As Moneybox noted in August, London-based investment banks charge commissions of about 3.6 percent on initial public offerings, compared with about 7 percent for U.S. firms. And Wall Street staffers are higher paid than their European and Asian counterparts across the board. A report by New York State Comptroller Alan Hevesi found that the average—the average!—salary of a finance job in New York was $289,664 in 2005.

And look at the compensation of the top executives at the main U.S. stock exchanges, who have been among the leading campaigners for relief from burdensome litigation and regulation costs. NYSE head John Thain, whose compensation can be seen in its recent proxy, earned a $4.12 million salary in 2005. Toss in a $2 million bonus and $120,000 in other compensation, and it comes to $6.24 million. That’s nowhere near the scandalous $139 million pay package his predecessor, Richard Grasso, received, but it’s still not bad. Nasdaq CEO Robert Greifeld’s compensation (detailed in the Nasdaq’s proxy) was $5.64 million in 2005. According to the proxy, Greifeld, a three-year veteran of the company, has also already accumulated 2.3 million shares worth about $92 million.

Nasdaq has been engaged in a hostile bid to take over the London Stock Exchange. Even though it has a larger market capitalization than Nasdaq, LSE’s top executive is paid far less than Greifeld. As this report shows, CEO Clara Furse took home a salary, bonus, and pension package worth 1.26 million pounds. At today’s very unfavorable exchange rate, that’s about $2.5 million. Furse, who has been CEO of LSE for five years, owns 300,000 shares of LSE, worth about 3.9 million pounds ($7.8 million).

NYSE is in the process of merging with the Pan-European exchange Euronext, which operates securities exchanges in France, the Netherlands, the United Kingdom, Belgium, and Portugal. But as the company’s annual report shows, its CEO, Jean-Francois Theodore, is hardly the equal of NYSE CEO John Thain when it comes to pay. His 2005 salary and bonus added up to 1.25 million euros (about $1.6 million at today’s rate). He also received 10,000 shares in long-term incentives, worth about $1.13 million.

Compensation is even lower at other overseas exchanges. At the Hong Kong Stock Exchange, Chief Executive Paul M.Y. Chow received a package last year worth 9.36 million Hong Kong dollars (about $1.2 million at today’s exchange rates) and another couple hundred thousand dollars in option benefits. OMX Group, a Sweden-based company, operates exchanges in six Baltic and Scandinavian countries. According to its annual report, CEO Magnus Böcker in 2005 received salary, pension, and benefits of 7.24 million krona ($1.06 million).

A few caveats apply when looking at the data. In some instances, the U.S. exchanges are larger businesses than their foreign competitors, so salaries would be expected to be higher. On the other hand, if the 2005 foreign salaries had been converted to dollars at 2005 rates, when the dollar was significantly stronger, the disparities would seem even greater in favor of the Americans. It is not surprising that the United States would overpay exchange bosses. Generally, the U.S. exchanges compete for executive talent with other U.S. companies—not with a global pool of exchange-executive talent. And the United States has a deeply rooted culture of excessive executive compensation.

As stock-trading and underwriting becomes less an only-in-America high-end service, and more a global commodity service, U.S. exchanges will have to start competing on cost. In a world of freely flowing capital and open borders, $50-per-hour U.S. manufacturing jobs don’t make much sense. The same might hold for $6 million salaries for stock-exchange bosses.