Bonuses Dive, Stocks Tank: Goodbye Income Gap?

Posted by: Dan Beucke on December 14, 2011 at 1:30 PM

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2011 is ending with a clunk for Masters of the Universe. Charlie Gasparino of Fox Business just Tweeted: “Sources at BOFA’s Merrill unit say execs are bracing for some of the lowest bonuses on Wall Street.” (Story here.) We already know that overall banker bonuses may tumble 30% this year, and not just on Wall Street. Stock returns are looking like they’ll be a wash for the year (chart, right). This is bad news for the 1%, the disproportionate recipients of lavish bonuses and holders of financial assets. But it probably shouldn’t fundamentally change the debate about rising income inequality, as some have suggested. At least not yet.

Earlier this week, the New York Times reported that the share of income going to the top 1 percent of earners actually fell during the recession. Data on top incomes from economists Thomas Piketty and Emmanuel Saez, when extended to 2009 by Steven Kaplan of the University of Chicago, show a sharp recent drop in top income shares, from 23 percent in 2007 to 17 percent in 2009. Megan McArdle of the Atlantic noted the fall-off in a post titled “The 1% Ain’t What It Used to Be.” She included the chart below, showing the trend from 1913 to 2009. (It may look familiar: through 2008 it’s exactly the same as the chart we used in our last post.)

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So the income gap is fixing itself … right? Probably not. As Megan mentions, the data are out of date, and 1%-ers may well have rebounded along with stocks and other assets in 2010. There is also the nature of how people get compensated at the top. Take bonuses. While cash compensation is tightening, many financial firms are “preparing to dole out huge amounts of stock at depressed prices,” as the Times’ DealBook blog put it:

“This year is the perfect situation where they can say it is a modest bonus season, but in the end, it could end up making many of them zillionaires,” said Jonathan R. Macey, a professor of corporate law and finance at Yale. “Not all banks may do well in the long run, but most will.”

There’s a reason why that chart of top-income shares swings up and down like the stock market chart. The better off you are, the more your income is tied to financial asset returns. Those returns are volatile and smart investors buy on the dip. So when stock, real estate, and other markets rebound, as they’re sure to do, don’t be surprised to see the income-share zig turn back into a zag.

 

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