Why Bankers Make Bank

Corporate executive officers have long been known to receive excessive amounts of monetary compensation in their positions of power, but where else are salary figures rampantly out of control?  John Rolfe and Peter Troobe’s insightful novel, Monkey Business, provides an inside’s look to the business practices and lives of employees within investment banks.  These firms are known for the massive amounts of money they pay their employees.  First year analysts, the entry-level investment banking position, commonly receive upwards of 120,000 dollars in full compensation packages.  It is common knowledge that people feel Wall Street is overpaid, but Monkey Business proves why such monetary payment is appropriate.

Investment banks specialize in connecting companies in search for capital with numerous wealthy investors all across the world.  They do this through analyzing the cash flows, projects, and operations of a company, which culminates into the development of a pitch book.  These “pitch books” are the bread and butter of investment banks.  Analysts will make hundreds of elaborate and lengthy pitch books on the evaluation of companies to give to associates and upper management only to have a handful actually presented to investors.  Because many things in the investment world are time sensitive, this consistently leads to “all-nighters” at the office in addition to the already grueling 100 to 120-hour workweeks that flow into the weekend.

Once the investment bank decides that they have a company worth pitching to investors, they have a group employees go on the “road show.”  This includes traveling to two cities a day that can be hundreds of miles apart.  The road show can last for a couple weeks, but is essential for distributing the investment opportunity that the firm is promoting to wealthy individuals or companies.  Once again, however, the low-level bank employees are forced on these treacherous travel schedules that span vastly different time zones with little extravagance or rest.

The results produced from extensive travels allow for investment banks to generate large revenues when providing initial public offerings or aiding in seasoned equity offerings.  In return, employees are handsomely rewarded for their diligence.  However, their costs include possessing social lives outside of work, the possibility to raise a family, and simple freedoms and luxuries that the typical employee enjoys.  This is a result of being constantly at risk of receiving a call, no matter the time or day, that requires for them to come to the office to complete work on a project.

Considering this form of activity is consistent even in upper levels of management, it should not be surprising that investment banks offer such high salaries.  While people may complain, they remain an essential middleman in providing financial support companies, something that affects all public firms and markets.  Monkey Business notes that for investment banks to create interest in such grueling workloads, they must provide lucrative compensation packages for people to feel as though the ends justify means.  So while critics may feel as though these extravagant salaries are unwarranted, it allows for investment banks to remain operational with willing employees that keep the gears of the economy functioning smoothly.

One Man’s Loss is Another Man’s Gain (Op-Ed)

Japan has just undergone one of the worst natural disasters in recent history, yet the price of their currency is skyrocketing.  Homes and communities are in complete disrepair, but national currency trading is reporting that the yen is exchanging for higher sums in comparison to previous weeks.

This must mean that the Japanese are inherently becoming wealthier as a result of this catastrophe, right?  Wrong, it illustrates the effects of fear and speculation.  While many individuals see these damages as devastating to the Japanese and world economy, there is a silver lining: an excellent period to short the value of the yen and earn wealth beyond your imagination.

As a result of the recent 8.9 magnitude earthquake and tsunami that struck Japan, the country is looking at damages approximating 200 billion dollars in rebuilding costs, excluding any insurance claims for benefits.  Because the Japanese government is facing such massive expenditures, they are forced to sell off reserves of foreign currencies in exchange for yen to pay for reconstruction expenses.  Those in possession of yen will ask for greater amounts of foreign currency per unit, which has since acted as the culprit for driving up the value of the yen.  When there is a limited supply, greater demand always causes for prices to increase.

Unfortunately, this appreciation of the yen is not stable.  The growth in the asking price for yen is artificial because if the price of yen rises indefinitely, Japan faces extreme inflation and the inability to repurchase their own currency.  Without any yen they cannot pay Japanese workers, which means they either resort to printing new money or converting to a new currency, both of which signify terrible economic stability and imminent collapse.  The collapse of one economy is devastating to global markets overall, and thus it is likely that a international governing body such as the G7 financial advisory group will make agreements in the coming days to limit the growth of the yen.  This is not the only step they will take either.  To ensure that the Japanese economy grows quickly from the ravages of this “perfect storm,” they will likely make moves to depreciate and stabilize the value of the yen so that the Japanese government can acquire as much domestic currency as possible.

The investment opportunities in Japan act as a significant upside to the current tragedies taking place.  With the proper investing technique, you could become tremendously wealthy off of the quick appreciation of yen prices and a strong likelihood for global intervention to qualm this accelerated growth.  This technique is known as shorting.  When someone “shorts” an investment such as currency, they borrow and sell a certain amount of currency at its current trading price under the assumption that they will return the amount borrowed after a period of time.  If I had the proper amount of money to invest, I would short as much yen as possible at its high price knowing that once the currency depreciates, I can purchase and return the amount borrowed and retain substantial profits.  The more money that you have to invest, they greater you have to gain.

While Japan is undoubtedly suffering one of the worst possible crises, the greatest times for earning profitable investments are when others face negative situations.  While this may seem insensitive to their plight, the world continues to revolve regardless of the situations of others.  If you do not take advantage of the situation, then some else will.  Would you prefer to “get rich” at the expense of others and possibly your own reputation?  What will others think?  Is it worthwhile?

I say yes.

Quit the Compensation? (Op-Ed)

Week after week we watch CEOs get paid millions of dollars in compensation for running their companies into the ground.  Many people are critical of executive compensation since banks began filing for bankruptcy in the beginning of the 2008 recession.  CEOs were given multi-million dollar parachute compensation packages while their companies and associated markets fell into pieces.

Congratulations!  Not only are they rewarded for poorly managing their companies, but they also do so at the expense of their investors.  In reality, these immense bonuses are typically given on a performance basis, but some critics are calling for executive compensation take the form of higher salaries rather than bonuses.

I think otherwise.

Recently, Chief Executive Officer Richard Waugh from the Bank of Nova Scotia was awarded $10.9 million dollars in compensation after the bank posted record profits.  This brings up controversy once again surrounding executive compensation.  Why should these officers get paid so much?  What are they doing that warrants receiving millions upon millions of dollars?  Critics such as the Institute for Policy Studies suggest that there are multiple repercussions for excessive executive pay, while others believe that the companies that produce the most consistent earnings are those that pay their CEOs a fixed salary over the entirety of the year.

The Institute for Policy Studies claims that the average employee is discouraged with their pay structure when they see their executive paid absorbent amounts of money.  While this is a valid point, these executives are responsible and held accountable for companywide operations and major investment decisions.  These judgments are those that produce profits for the company, and as a result these CEOs request compensation.  It only seems valid to reward these figures with equity compensation in company stocks as this makes the executive more invested in company actions.  Additionally, they are directly responsible for decisions made to generate company profits, and therefore should be rewarded handsomely if they prove to establish successful ventures that benefit the firm.

If CEOs were paid on a fixed salary basis, a couple issues would arise.  A fixed annual salary suggests that the individual executive has zero performance incentives.  They still get paid the same amount whether they boost annual sales by 50% or send the company into the ground.  This provides a cushion for CEOs.  They can allow for status quo to occur while receiving pay for providing little to no progressive decisions that foster company and stock value growth.  All of which benefit the investors.  Without providing performance incentives for executives, they can get away with receiving payments for doing as little work as possible.

While some critics might say otherwise, executive bonuses are essential to foster capitalism and promote a growing market.  Bonuses typically take the form of stock options, which makes the CEO have a greater percentage of ownership in the company.  Likewise, this concept pushes executive officers to have greater investment into the companies they oversee, meaning that they are less likely to lead apathetically if their salary bonuses are based primarily on stock value performance.  Investors are happy because this form of compensation makes the executive just another simple investor who is concerned about stock value, something which is beneficial for all those with a stake in the company if this means greater company operation.  This is additionally beneficial to the consumer because they see the results of CEOs that are invested in the performance of their company: greater competition, lower product prices, and greater services to make companies stand out amongst each other. 

While investors and consumers benefit from bonus compensation forms, so does the economy.  Greater competition is an indication of a larger variety in products.  With a greater number of products means higher penetration into different global markets, increasing sales revenues and company profits.  These profits are invested back into different sectors of business operations, which allows for multiple companies to benefit from the growth of a single business.  As a result, the growth of the economy is spurred because there is more money spent, all thanks to compensating executives through bonuses rather than larger fixed salaries.