New York State Comptroller Thomas DiNapoli issued a press release Wednesday titled, “Wall Street Bonuses Went Up In 2013, Bonuses Were Boosted by Deferred Compensation” (also mentioned on the front page of Section C of yesterday’s The Wall Street Journal). As explained by the Comptroller, this is good news. Consider these three facts:
First, the report clarifies that much of the increase was attributable to deferred compensation, payable in later years and subject to forfeiture or clawback if current financial results turn out to be not as good as they first appeared. This is exactly what Dodd-Frank Act Section 956 and the 2010 Interagency Guidance on Sound Incentive Compensation Polices sought to achieve.
The securities industry has undergone a major overhaul since the 2008 financial crisis. Regulatory reforms are changing the way the industry does business by requiring larger reserves, limiting proprietary trading, and imposing other changes intended to reduce unnecessary risk and enhance transparency. In response to compensation reforms, firms now pay a smaller share of bonuses in the current year, and a larger share is deferred to future years.
Second, the press release notes the enormous increases in tax revenues to the city and state (I expect that we will hear the same note of gratitude from the federal government in the days ahead):
- The securities industry generates a significant amount of tax revenue for New York state and New York City. DiNapoli estimates New York City collected $3.8 billion in taxes in fiscal year 2013 from activities directly attributed to the securities industry, nearly 27% more than in the prior year and the second-highest level on record. Although less than the prerecession peak (11%), the securities industry accounted for 8.5% of the city’s tax revenues;
- New York state, which depends more heavily on Wall Street revenues than the city does, collected $10.3 billion in taxes attributed to the securities industry during SFY 2012-13. Last year, the securities industry accounted for 16% of all state tax revenue, less than the prerecession peak (20%); and
- City tax revenues could be $100 million higher than anticipated in the city’s budget because it assumed a 5% decline in the bonus pool. The state budget assumes a 7.8% increase in bonuses for the entire financial sector.
Finally, “Wall Street” produced significant investment returns for investors in 2013, including the pension funds on which nearly all working Americans rely.
It just goes to show that we ought to always look on the bright side of life.