Chapter 2

PAY FOR PERFORMANCE

Wall Street’s Bonus System

An important feature of Wall Street is a bonus system that pays workers on the basis of performance evaluations. Unlike occupations that pay hourly wages or annual salaries, this is a variable compensation system. Most Wall Street professionals receive a fixed salary of $80,000–100,000 per year, but the majority of their pay takes the form of a bonus that is based on performance reviews. Wall Street’s bonus system allowed workers in the 1990s to reap the benefits of booming financial markets. Among workers who received a bonus in 1997, the median total pay was $410,000, suggesting that the average bonus for vice presidents with five to seven years in the business was approximately $300,000–$325,000. Variable bonuses provide incentives for employees to work hard, to put in long hours, to work on the biggest and most important deals, and to work with the most important clients.¹

This compensation system implies that pay is distributed rationally on the basis of individual merit. Fourteen percent of the men and women I interviewed explicitly described the compensation system as a meritocracy, expressing a common belief that Wall Street pays workers based on the profits they produce, and not on their gender, race, or other accidental characteristics. In the late 1980s, Patricia Douglas of Shearson Lehman Hutton said, “The bottom line is the only thing that counts anymore. If you can make money for the firm, no one cares if you’re female or black or anything else. You could be blue, and the only question anybody would ask would be, ‘How much business are you bringing in?’ ”² Echoing this sentiment a decade later, Penny said, “You could be green and a Martian. If you produce revenue, they just don’t care, which is one of the charms of the firm.” Penny worked as a trader and made about $750,000 in 1997.

Pay for performance implies that performance can be measured, and Wall Street firms measure performance through an elaborate evaluation system. Each employee is evaluated by his or her manager(s), peers, and subordinates in what many referred to as a “360-degree review.” Leslie said,

The whole firm takes it so seriously. There are these huge packages, everything is automated on the computer, so you fill in many pages’ worth of questions and you have to get reviews from people at your same level, below you, and above you. Minimum of six. All the people in the firm that you work with. And people can ask you, too. Some people will be asked by twenty or thirty people to do their reviews. It’s just a massive process. It’s very impressive, I think, that they take the time to think about it and do it this way and that they put so much emphasis on it and that it is so important. And I think that your rewards are directly related to these reviews. They have a lot of weight.

Managers compile these reviews and use them to rank each employee relative to his or her same-level peers. Compensation amounts are then based on these rankings, and many Wall Street workers viewed their reviews as directly related to their pay.

This compensation system heightened the equation of money with the value of work and of workers, so that Wall Street workers were driven by compensation as a measure of their success and professional worth. If this was not their initial motivation, they learned over time to equate their value with their bonus. Danielle remarked,

I still say the money never meant that much to me but it does. But it does. Where you’re ranked in your class, what they think of you, what your future is there, it’s a reflection of a lot of things other than the money. I guess I hadn’t realized that so much either. So, going in, I knew it was very well paying and I knew whatever I was making would be fine for us to live on, but it wasn’t until I got there that I understood the competitive aspect of it.

As Danielle suggested, success and career satisfaction were tightly linked to relative pay and to the belief that pay accurately reflected ability and effort. So bonuses took on a symbolic importance in addition to having a straightforward pecuniary value. Bonus pay was more than just money—it was the marker of personal and organizational success.

But Wall Street workers often did not have accurate information about others’ pay, making it difficult for them to ascertain whether or not they were paid fairly. Wall Street firms are deliberately secretive about the distribution of bonuses, giving managers much discretion over them and preventing employees from knowing whether they are underpaid relative to their peers and by how much. This secrecy makes it difficult for workers to establish whether or not pay really reflects performance.

The relationship between pay and performance was also questionable because there were several nonmerit influences that clearly affected bonuses. Several people referred to firm revenues as a “pie” where the year-end bonus was based on at least three things: (1) total firm revenues for the year (how big a pie there is to divide); (2) the revenue production of the group and its contribution to the firm’s profits (how large a slice of the pie is allocated to the group); and (3) the performance of individual employees relative to their peers, as evaluated by others within the work group (how large a bite each employee within the group deserves). Given this pie metaphor, more than individual performance is involved in computing the year-end bonus.

At the firm level, the profits and losses of the firm affect the amount of money that is available to distribute, setting natural upper limits on the amount of money that was available to pay out regardless of how hard employees worked or how talented they were. Barbara remarked,

You know, when you talk about bonus pools, every firm is going to have something that impacted their bonuses that’s different. [One firm], for example, always has other substantial impact from proprietary donor losses that wouldn’t affect . . . other Wall Street firms.

The profits and losses of the firm influenced the money available for bonuses in ways that were unrelated to the performance of individuals.

All employees receive higher bonuses when the firm has a lucrative year, and all Wall Street firms pay larger bonuses in a bull market. Stan, who worked in sales, described the effects of the market on his pay.

I think we’ve been—everyone in this industry has been a huge beneficiary of a huge bull market. If you were to ask me when I got out of school if I’d be making what I’m making this year, I would have fainted probably. It has been much higher than my expectations.

The long bull market meant that there were plenty of deals to work on and high profits for Wall Street firms, generating ever larger pies to be distributed as bonuses to revenue-producing employees. Freshly minted MBAs who landed in groups where deals were flowing were well poised for success.

On the other hand, proprietary losses in the firm’s portfolio of investments and economic downturns also lead to lower bonuses regardless of individual effort and ability. Tracy, a trader, observed that the reviews could reflect the firm profits more than they reflected workers’ performance.

The funny thing is they always get swayed in terms of how much the firm is paying out. If the firm is having a sucky year, and they’re not going to pay, suddenly you have all these areas of development that you need to work on that you were doing just fine with last review or even six months earlier when you have your midyear review. You’re doing fine but . . . this year the firm did not do well and they did not pay well and everybody got these ridiculous reviews saying, “You’re not doing well in this, that, and the other thing.” Whereas, literally, your six-month reviews were late by three months so three months ago we were all doing fine. . . . Because they can’t say, “Oh, you did phenomenal. You met your P&L [profit and loss] expectations. You used your balance sheet effectively. Your peers thought you were great. And we’re decreasing your pay by 66 percent because we had a bad year.” I guess they think it’s a lawsuit waiting to happen or something. So they kind of give you a less-than-raving review. It doesn’t happen every year but, in turn, when they think they’re paying you well, they’ll give you good reviews, too.

In her view, firms tailored their reviews to reflect their ability to pay, and reviews could be manipulated to justify the bonus rather than used as a basis for it. George also described how he had received a low bonus one year because his firm had proprietary losses, leading him to swiftly change firms.

They had a very, very bad year. Enormous proprietary losses. They fired 20 percent of their personnel. They were almost down to their knees and the atmosphere was extremely bad. When you fire 20 percent of your people and you never know if it’s you, it’s not fun. . . . After compensation, which was very bad, I told my boss that I would just leave the firm and I left the firm after about five weeks . . . for an increase in total compensation of around 250 percent vis-à-vis my low. This was just more proof that there are very strange things happening in this industry. If you can, by finding another job, increase your salary by a factor of two and a half, that means obviously my compensation was too low.

He viewed his low bonus as a consequence of firm-level effects and not his performance. As in this case, proprietary losses and mergers could lead to low bonuses and to layoffs with no connection to junior workers’ skills or efforts. Clearly, then, performance was not the sole or perhaps even the primary determinant of pay.

Just as firm profits set upper limits on bonuses and could affect performance evaluations, the work group also entered the equation. People who worked in groups where their firms had solid expertise and good reputations were more likely to be successful. Chris described how his second firm’s reputation increased his revenue-producing ability in sales.

It’s a much more trading-oriented firm . . . there is almost a trader worship. The options traders always made a lot of money, compared to everyone else, for the firm. But the reason for that is even though they were kind of stumped and they would not show good prices, believe it or not, people will deal with [my firm] outside the bid-ask spread. Which is amazing! Outside the bid-ask spread for products. If the market offers at say 10, people will deal with [my firm] at 12. They will pay more just because it’s [my firm] and we can provide the services that others can’t. It’s amazing! These guys were living on it. They were doing things that no one else would do, and there were fat, huge spreads.

Chris was in a position where his opportunities to succeed were amplified by the firm’s prestige and reputation in his area. Each Wall Street firm had areas of strength, and workers in those areas encountered a constant stream of transactions and abundant opportunities to prove themselves.

By the same token, working in groups that had a poor flow of business could negatively affect careers and compensation despite the overall boom in the market and regardless of individual merit. Eleven percent of workers (14 percent of the women and 6 percent of the men) changed jobs because of limited deal flow. When securities firms reduced their workforces, workers in areas that had poor earnings were the first to go even though they were not responsible for generating deals or new accounts as junior employees. It was not their own performance that sealed their fate.

On the other hand, their own performance supposedly affected differences in bonuses among professionals performing exactly the same job. These individual differences were based on performance reviews, and could be very large. But while these differences were defined as merit based, performance evaluations may be affected by subjective influences, including gender biases, especially in areas where individual performance is more difficult to measure.³ Given the importance of manager and peer evaluations, it would be difficult or impossible for merit to be the only criterion for bonus allocations. Approximately two-thirds (64 percent) of the men and women I interviewed pointed to criteria affecting bonus allocations that were unrelated to merit; job performance was never the only contributor to actual compensation.

For example, political alliances could produce more positive evaluations and higher pay. Grant, who left investment banking to work for a former client’s start-up company, viewed alliances with managers as more important influences on bonuses than reviews or job performance.

The manager [will] have to basically say, “All right, out of my ten people, for which two am I going to absolutely scream and yell to get my way? And once I do that I’m out of ammunition. I don’t have enough political capital to get the rest of the people on the list paid the top. So I’ll fight for these two, and these six will get the middle and whatever.” So it really came down to how you were fitting in with that manager.

Managers ranked employees based on their perceptions of their employees’ competence, effort, and relative contributions, as well as on feedback about the perceptions of coworkers and clients. But these perceptions could also be swayed by managers’ affinities for particular workers that were only tangentially related to actual skills or abilities.

The Division of Labor on Wall Street

It is clear that some influences on bonuses are unrelated to the skill and effort of individual workers. One important influence on pay that deserves additional attention is the division of labor on Wall Street. The various areas of securities firms had different relations to revenues and different procedures for evaluating performance, so that the financial functions in which professionals specialized affected their careers and their pay. Major securities firms contain several interlocking functions, including three broad areas on the “sell side”: investment banking, sales and trading, and equity research. These sell-side functions analyze corporations’ financial condition, underwrite debt and equity to be issued on the public market, and sell debt and equity issues. These functions are usually further subdivided into “groups,” which specialize in particular industries or financial products. They have been the traditional domain of investment banks since the 1933 Glass-Steagall Act, which prohibited institutions that underwrite securities from offering advice to investors on purchases of securities. Because Glass-Steagall was dismantled in the 1980s, most major contemporary securities firms also have merchant banking, proprietary trading, and/or asset management divisions, which manage portfolios on the buy side. These divisions purchase debt and equity interests as investments for institutional or personal investors and manage portfolios of investment securities.

Within the five main functions, specialized “groups” focus on specific industries, geographic regions, or financial products like asset-backed securities, high-yield securities, or foreign exchange options. The work group’s revenues for the year affect the pool of money available to distribute as year-end bonuses within the group, leading compensation to differ by area of the industry. The various areas also had different relations to firm revenues and different algorithms for calculating bonus pay, leading some areas to be more lucrative than others. Figure 2.1 illustrates average pay by area for the men and women I interviewed, revealing that average income was highest in corporate finance ($539,700) and then sales and trading ($506,250).⁴ The lowest average pay was $260,000 for public finance, and equity research was in the middle. In the sections that follow, I highlight what workers in different areas do and how performance is evaluated in each area of the industry.

Fig. 2.1. Average compensation by function

Investment Banking

Investment banking functions are divided into corporate finance and public finance. In corporate finance, investment bankers analyze corporations’ financial condition and profitability. They use their analyses to underwrite new stock issues, assisting private companies in taking their shares onto the public stock market for the first time in initial public offerings (IPOs) or using already publicly held firms’ equity growth to issue additional shares on the public market to raise capital. Some investment bankers use assets or mortgages to structure new securities using mathematical models of projected returns on investment. Others help corporations negotiate M&A, analyzing the prospective profits and the value of each party’s shares. In public finance, investment bankers underwrite loans and securities for tax-exempt and government institutions. Public finance differs from corporate finance in terms of the type of clients and also in the fact that corporate finance underwrites both debt and equity, while public finance underwrites only debt.

Investment bankers typically work long and unpredictable hours. Senior bankers pitch business to prospective client organizations and develop relationships with clients who require ongoing financial services, while teams of more junior employees evaluate the clients’ financial condition, develop presentations, and structure deals using mathematical models. Junior associates work long hours because they are assigned to multiple deals with strict deadlines for analyses and presentations. In the first four to seven years in the business, workers are not required to bring in business but sometimes work literally around-the-clock. As an investment banker’s career progresses, the hours usually decline and generating client relationships becomes more important.

Investment bankers work on deals with teams of other bankers, and their fees reflect the collective enterprise of the team. Relative contributions to the team effort are evaluated by other team members, and clients’ impressions are also considered. As a result, individuals’ bonuses are partly dependent on the performance of others in the group and the perceptions of their managers, coworkers, and subordinates. The opinions of managers are especially important since they are on the compensation committee. These managers have to tease out the individual contributions of multiple team members in order to rank individuals. Because this task is not accomplished easily or accurately, managers have some discretion as to how to rank subordinates.

Since the elimination of fixed commissions in 1975 and the gradual erosion of commissions for selling securities, fees for investment banking have become an increasing share of firm revenues.⁵ Client companies pay investment bankers fees for “deals” that issue stock or securities, or that arrange mergers and acquisitions. These fees affect the amount of money available for bonuses in each investment banking group, so that the number and size of the group’s deals influence individuals’ compensation by affecting the pool of money to be distributed among workers. Rosalind, who worked in mergers and acquisitions before starting a small securities business with a more senior banker, remarked,

I think it was important that I worked on deals because there were people who worked on a lot of things that didn’t close. For example, consumer products are a good example. There were a lot of people [in that group] who would work on a lot of different things throughout the year but nothing really got done and no fees came in. You were told that you weren’t, as a junior person, held accountable for that but I never really believed that, which is why I really wanted to find a place where deals were happening and get it done. On a basic level I think it was important that you worked on deals and brought fees in.

In the early years of Wall Street careers, workers were not expected to bring in clients, but their group’s flow of revenue-producing work was important for their bonus pay as well as their longevity in the industry.

In large securities firms, investment banking areas often specialize into groups by industry (e.g., metals and mining, technology), region (e.g., Asia, Latin America), or financial product (e.g., mergers and acquisitions, high-yield, asset-backed securities). These specializations define the pool of client organizations, which affects bankers’ pay because some types of clients engage in deals with larger fees. For example, automotive, oil and gas, and large industrial companies generate more corporate finance revenue than do retail industries. Differences in specializations could produce gender inequality because men were more likely to work with clients from higher-revenue industries like natural resources, technology, or financial institutions while women were more likely to specialize in lower-revenue areas like emerging markets. Emerging markets groups serve countries with relatively small GDPs, so their clients pay smaller fees even though their deals involve a similar amount and type of work. Olivia, who worked in emerging markets with developing countries in Latin America, said,

I cover little countries. I cover Colombia, Venezuela, Peru, Panama, and Central America. Those countries issue little—the governments issue little securities. They’re on a different scale. If I do a $200 million transaction, my boss says, “Oh. Okay.” But if Argentina does a billion-dollar deal, that’s great. Now, it’s great because it’s big. Because it gives them a big lead table so [the firm] is number one. But ultimately the effort that you put into a $200 million deal, for a country where that $200 million is a lot, doesn’t count only because they want the revenue generated. It’s not big enough.

In other words, her group’s revenues were limited by its clients’ GDPs, not by the skill required or the effort expended on the deals. Interestingly, white men started to abandon emerging markets before the 1990s and were largely replaced with white women, immigrants, and nonwhites.

Public finance also pays less than corporate finance because it has nonprofit institutions and municipalities as clients. Women were more likely to work in public finance and none of the men I interviewed worked in public finance. Fisher notes that men fled the public finance side of the business in the late 1970s when “eager young fast-trackers in august investment-banking firms dodged public finance in favor of corporate deal-making.”⁶ Because clients in public finance generally pay smaller fees, bonuses are also lower than in corporate finance, even though the hours and travel are often equally difficult. Regarding her bonus, Caitlin explained,

I am in the top for my level in my department. [My current firm] is cheap. The same job at [another major investment bank] would pay me more money. The same job anywhere in corporate finance versus public finance would pay me a lot more money. So, for my department, I’m doing great! If you look at comparables outside, and mind you I don’t get to keep all of that bonus—10 percent is restricted stock—at the end of the day I am not raking in the big bucks. And I have this pretty rough lifestyle.

Caitlin described in detail the personal sacrifices required by high travel demands and long hours in her job, even while it did not provide as much pay as corporate finance positions. Tamara also worked in public finance and noted that it pays much less: “The profits are a lot lower because you’re working for nonprofit organizations.” So clients’ ability to pay was at least as important as investment bankers’ efforts or skills. In general, corporate finance is a high-paying area of the industry, with some variation by industry or regional specialization, and public finance is relatively lower paying (even though it pays very well by the standards of the labor force as a whole).

Few compensation figures were available from the industry, but a survey of executive recruiters who worked with major securities firms provided some figures for corporate finance that corresponded closely with the average figures for the men and women in this study.⁷ The survey summarized average pay in corporate finance in 1997 for different MBA cohorts, indicating that “low”-range Wall Street professionals who had graduated in 1993 earned $300,000 in 1997. Most of them were approximately thirty years old at the time. This amount is more than twice the $128,521 cutoff for the ninety-fifth percentile of household income in the United States for the same year.⁸ Table 2.1 compares the survey data, published in Investment Dealers’ Digest, with the medians for corporate finance employees in the study.⁹ The earnings of these men and women are similar to industry estimates for corporate finance, representing 92.5 percent of industry estimates for 1991 graduates, 97.2 percent for 1992 graduates, and 107 percent for 1993 MBAs. Unfortunately, no industry data were available for public finance.

TABLE 2.1
Average Annual Pay Ranges for Investment Bankers, 1997

Sales and Trading

Sales and trading functions buy and sell securities on the public stock exchange. Prior to 1975, the NYSE was a unique cartel with unlimited power to establish commission rates, and it maintained a policy of fixed commissions for member firms and prohibited discounts for large orders. Institutional trading and mutual funds that involved high-volume trades increased in the 1950s and 1960s. Facing pressure from the SEC, in 1968 the NYSE instituted a volume discount on transactions over 1,000 shares. The SEC finally eliminated fixed commissions on May 1, 1975, leading the relative importance of commissions to decline after that time.¹⁰ This decline generated diversification and innovation in financial services in order to expand sales and trading revenues.¹¹ For example, derivatives were created so that firms could structure fees into the securities themselves.

Despite the decline in commission rates since fixed commissions were eliminated, sales and trading is still known to be one of the better-paying areas on Wall Street. These areas involve substantial direct client contact, especially over the phone. Sales and trading are driven by market conditions and tend to be very stressful during market hours. Like investment banking, sales and trading are often divided into groups or “desks” based on industry, region, or product. But unlike investment bankers, salespeople and traders tend not to work long hours after the market has closed unless they are entertaining clients. Unfortunately, no industry figures are available for pay in sales and trading, but the median income among the salespeople and traders I interviewed was $450,000.

Individual performance can be monitored more accurately in sales and trading than in investment banking because of P&L records. Justin, who earned $650,000 in 1997, described his compensation in sales as based directly on revenues.

We, out of this department, aren’t really on a bonus structure. It’s more of a commission structure. Institutional sales, you know. It can be considered as a bonus but it really isn’t. It’s more a percentage of what you bring in. Well, what happens is, many times they will get a bonus; the bonus is more or less within a percentage range of what they are bringing in, in terms of revenue during the year.

Some salespeople and traders receive a commission, rather than a bonus, while others receive a bonus that is at least partly based on their profits and losses.

Of course, the distribution of accounts could be equitable or inequitable, and inequality in account distribution might contribute to a gender gap in pay in sales and trading. Barbara, who worked in sales, noted that the account allocation was unfairly biased toward people who were verbally demanding—who tended to be men—rather than toward those who were more effective at selling.

I don’t think the account process is fair. . . . I think people who are more aggressive and go in and ask for more accounts, get the accounts. I don’t do that. It’s probably my own fault. Sometimes I do, but not as much as a lot of people here—a lot of men. I find men . . . go in there and say, “I want an account. I deserve it. I’ve been working my butt off. I did x, y, and z with this account.” . . . I think the people who don’t produce with certain accounts go in and say, “That account, I didn’t get anywhere without account. I need another account.” And then they keep that account, and get another account. Then he’ll say to me, “You know, Barbara, you have lots of sales credits. You have nothing to complain about.” Yes, because I’m producing with the accounts I have! I also see cases where other people do get an account and produce with it and are not necessarily rewarded—like being given a bigger account, a more challenging account, or an account that . . . people should be rewarded by getting bigger accounts. Showing that they can get a 100 percent out of what’s there. They should get a bigger account.

From her perspective, sales accounts were not distributed on the basis of merit, and the allocation of departing brokers’ accounts favored men who were poor performers because they tended to be pushy.¹² So while most Wall Street firms used profit and loss criteria for rewarding sales and trading employees, opportunities to perform in the form of good accounts could be unequal. This type of discrimination in the allocation of accounts is exactly what female brokers at Merrill Lynch alleged in their class action suit.

Equity Research

Equity research departments advise sales and trading, investment banking, and asset management with in-depth analyses of companies and market trends. Financial professionals in these areas are called “analysts.” Research analysts tend to work more predictable hours than do investment bankers, and their amount and extent of client contact vary widely. Some analysts juggle multiple roles of tracking stocks, scouting for merger ideas, seeking lucrative underwriting business for their firms, and/or generating sales commissions. They usually specialize by industry and write reports analyzing the health and profitability of companies in their industry. Institutional Investor (II) magazine ranks equity research analysts in all major industries every October. These rankings are based on a survey of investors who use analysts’ advice to select investments. II rankings are a vote of confidence and a lure for prospective investment banking clients, leading these ranks to dramatically increase an analyst’s pay.

Analysts’ reports recommend that salespeople and traders buy, sell, or hold stocks and bonds in their industry. These analysts also advise investment bankers of companies in their industry that would make good prospective clients for underwriting or M&A business, and provide information on companies that are already clients. The expertise of an analyst can make or break an investment banking deal, and some client companies work with particular investment banks because of the reputations of their analysts. Since the erosion of sales commissions, working with investment banking has become increasingly important for research analysts because investment banking fees represent an ever larger share of firm revenues.

In equity research, evaluations depend on whether or not an analyst has an II ranking and the degree to which salespeople, traders, and investment bankers trust or follow his or her advice. Evaluations from sales and trading and investment banking are necessarily somewhat subjective, and there is some evidence that Wall Street firms deliberately maintain ambiguity about how analyst pay is related to investment banking. Andy Kessler, who was a highly ranked technology analyst, described how working on investment banking deals affected his pay in equity research.

Analysts didn’t get paid directly for deals at Morgan Stanley. One year, they actually put in a formula to do just that, but someone in management wised up and put a halt to it. They didn’t want a paper trail back to the formula, so banking compensation remained a loose concept. A good or bad word from bankers could add or subtract 25 percent of my pay in a heartbeat.¹³

This insider’s quote suggests that Wall Street firms prefer to maintain some discretion over bonuses when they can—and they can for equity research.

Still, because of their increasing role in investment banking deals and their rising visibility among industry clients, analyst pay rose dramatically in the 1990s, and equity analysts with high II rankings were sought after and paid exceptionally well. Investment Dealers’ Digest estimated that most top-ranked analysts earned $600,000 to $900,000 while senior analysts without II rankings earned in the range of $200,000 to $350,000 in 1997.¹⁴ Among the men and women in equity research I interviewed, only two had top II rankings, and their compensation was $650,000 and over $1 million, respectively. Compensation ranged between $162,500 and $375,000 for other equity analysts who remained in top firms, with a median of $280,000.¹⁵ These averages are very similar to the published industry figures for the same year, suggesting that the people I interviewed were quite representative of the research analysts on Wall Street at the time.

Asset Management

Employees in asset management areas manage portfolios of investments and earn commissions when they buy and sell stocks and mutual funds. They rely on research analysts’ advice in choosing securities. Asset management usually involves similar hours to those of trading. But because it depends on commissions and the growth of investments over time, asset management is usually less lucrative than conventional sell-side areas. Evaluations in asset management often involve direct calculations similar to sales and trading, such that portfolio managers and proprietary traders are paid based on the value of assets they manage or the profits on securities they purchase and sell for the firm. No industry data were available for asset management, but the median income in asset management in the sample was $300,000.

Support Functions

Securities firms also require a corporate infrastructure in the form of internal divisions involved in risk management, corporate strategy, operations, information technology, public relations, and human resources. For example, employees in risk management analyze the actions of salespeople and traders to ensure that they do not compromise the economic stability of the firm, monitoring the volume of trades to ensure that no trader or salesperson is gambling too heavily with the firm’s capital.¹⁶ To illustrate, in 1994 Nick Leeson, a trader in Hong Kong, lost over a billion dollars and bankrupted Baring’s, the British investment bank. Risk management employees are the “back office” that oversees traders to reduce the likelihood of this type of fiasco. In Leeson’s case, he was given risk management guidelines but no back office to make sure that he followed them. Trusting Leeson to be his own back office was the firm’s biggest and most devastating mistake.

Workers in support areas work regular business hours or a little bit longer. Bonuses in these areas tend to be lower than in other areas because they are not directly involved in the production of revenues, even though they provide valuable indirect support for front-line areas. Their bonuses are based on evaluations of other workers, both within their function and in direct-revenue areas with which they have contact. Because there is no direct evidence of profits generated for the firm, these evaluations are necessarily somewhat subjective.

In most areas of Wall Street firms, promotions for the first six years are “lockstep,” occurring at regular intervals for employees who persevere. In this regard, the progression of this career path resembles other professional schedules, like academic tenure clocks or legal partnership timetables. Sarah said, “It’s a fairly predictable path unless there’s something definitely wrong. Unless you’re having some problems, I should say. But in general, it’s a fairly predictable path.” At the entry level, professionals in sell-side functions have the title of associate. Those who remain in the industry for four years are promoted to vice president.¹⁷ Promotion to senior vice president¹⁸ occurs after another two years, while promotion to the highest level, managing director, is less certain and often depends on one’s active development of client relationships and ability to bring in business. As securities professionals move beyond the level of vice president, their hours often become shorter, their pay increases, and they describe the work as more interesting. Many Wall Street professionals view the first four years as both a learning experience and an endurance test. Those who are unable to hang on to these high-paying, stressful jobs through this period never regain access to the profession’s fast track.

Two things should be clear about this division of labor. First, if women disproportionately work in the lower-paying specializations, then this may explain some gender inequality in pay on Wall Street. It is well-known that sex segregation of men and women into different jobs is responsible for a substantial proportion of the gender gap in pay in the labor force.¹⁹ Internal segregation of women into lower-paying areas of the securities industry may similarly explain a substantial amount of gender inequality in pay. Second, performance evaluations always have nonmerit influences but they are also more subjective in some areas than others. Performance and pay may be more loosely coupled in those areas. Subjectivity has the potential to overreward workers who are liked by their senior managers relative to their performance and to underreward those who step outside the mold. This could be detrimental to women who try to break into the most male-dominated areas of the industry.

Conclusion

This chapter has provided background on the securities industry, its compensation system, and influences on individual bonuses. This background suggests that although Wall Street defines its pay system as a meritocracy, this is really a myth. There are a variety of influences on bonuses that are unrelated to individual merit, so that pay based on performance evaluations is not purely merit based. Some of the influences on bonuses are gender neutral, like the total firm revenues. But as the remaining chapters will illustrate, Wall Street’s distribution of rewards also has a disparate impact by gender and leads to structural gender inequality in two ways. First, performance itself is a consequence of opportunities offered (or denied), and decisions about how to distribute these opportunities to perform are subjective. Women workers—and remember, by objective standards, these women matched their male counterparts—described how managers did not assign them to the most important accounts or deals: managers promoted those who closely resembled themselves and/or their clients. By the same logic, managers deliberately assigned their female employees to work on accounts with female clients, but those accounts tended to be less lucrative. Senior male managers also sometimes took men under their wing because they shared common backgrounds and interests, and they gave them better access to lucrative accounts and deals. In these ways, opportunities to perform were distributed unequally by gender.

Second, while the compensation system on Wall Street seems rational and efficient, performance is hard to measure. The harder it is to measure, the more subjectivity affects evaluations. Both the men and women I interviewed talked about the subjectivity of the performance review process, and women often pointed to gender double standards and discrimination in their evaluations. When criteria for performance are unclear, performance evaluations allow subjective biases to operate unchecked. In a male-dominated industry and culture, these subjective biases encourage gender inequality.

This background on the securities industry is important for understanding how gender inequality might occur even if there are no gender differences in performance. The distribution of men and women across areas within the industry is one possible contributor, if women disproportionately work in lower-paying areas. The infiltration of subjective perceptions also potentially leads to gender differences that are not performance based. In fact, because of this subjectivity, the bonus system permitted very subtle and unconscious discrimination against women to operate with impunity. But before analyzing the specific subtle mechanics of inequality, it is important to know how much gender inequality there was on Wall Street in the late 1990s, both in absolute terms and net of other influences. The next chapter explores these differences.