This morning, Barry Ritholtz of Bloomberg View reported a few holy-crap numbers: The Pacific Investment Management Company — the bond giant better known as Pimco — paid its former chief investment officer, Bill Gross, a $290 million bonus last year. Its former chief executive officer, Mohamed El-Erian, got $230 million.
Those numbers are, needless to say, very, very, very big, even in the heady world of finance. They place the two comfortably in the top 0.01 percent of earners. (The income threshold to join that small club is a piker’s $10.3 million, as of 2012.) And, as Bloomberg notes, those paydays hugely beat those of many of El-Erian and Gross’s peers. Last year, Larry Fink of BlackRock made about $23 million, as did Lloyd Blankfein of Goldman Sachs. The head of Allianz, Pimco’s corporate parent, made just $9 million.
There are generally a few explanations for such outsize earnings. First is the superstar effect. You’re J.K. Rowling, Brad Pitt, Shakira, Lebron James, Taylor Swift, Bill Clinton, or America’s top neurosurgeon. You’re so good, and people love you so much, that you command a market premium — often vastly more than your near-peers do. You’re 10 percent better, but you get paid 100 percent more. Or you’re 100 percent better and get paid a million percent more.
The second explanation is that you’re lucky. You shot the moon. You’re the head of a company that just got bought by General Electric or Google. You’re the holder of a patent that a big pharmaceutical company wants. Your firm just went public and its share price went pop. Your hedge fund bet it all on a counterintuitive investment, and the bet panned out. Your payday was unusual, singular, and likely irreproducible.
The third is that you have a racket going or are in a less than ideally competitive market. You have a monopoly on the extraction of a natural resource or over a patent. Your industry produces excess profits thanks to government regulations or collusion among your supposed competitors. Consumers, for whatever reason, do not have sufficient insight into what you are really up to.
The question is which of those three categories Pimco and its executives fit in. I’m sure that people on Wall Street would love to tell you that they fit cleanly into slot number one: They’re just so good that they are worth that much! But that explanation is belied at least in part by Pimco’s own returns: The firm trailed 65 percent of its peers in 2013 after beating 90 percent of them in 2012, Bloomberg found. Its main fund actually lost money last year.
Onto theory two: Might there have been some unusual reason for the big paydays? I guess it is possible. Pimco might have been trying to keep El-Erian and Gross around. Both ended up leaving this year. Who knows what corporate wrangling happened behind closed doors.
But my sneaking suspicion is that the mammoth payday had at least something to do with the swamp that lies behind door number three. There is relatively little insight into what Pimco’s managers get paid, even though they work for a public company — hence the big brouhaha around the numbers this morning. Check out page 40 on this document. You won’t find El-Erian or Gross’s compensation listed there. As my former colleague Kevin Roose explains:
In the U.S., there are laws requiring disclosure of executive pay, and boards generally don’t like to approve pay packages for CEOs that are significantly higher than those of their competitors. (For one thing, it makes them look greedy.) But Gross’s company, Pimco, was bought by Allianz, a German financial services company that doesn’t have to follow U.S. disclosure rules regarding executive pay, So while the compensation packages of Lloyd Blankfein, Jamie Dimon, and other American CEOs are only a Google search away, Gross’s millions got to remain entirely in the dark.
You could be a major investor in Pimco and still have no idea what its top executives were taking home. You could even be a major Allianz shareholder and have no idea that the company felt that just two employees were worth half a billion a year.
Moreover, Gross and El-Erian were operating in an extractive industry where outsize paydays are way too often the norm. Hedge funds, investment banks, private-equity firms, mutual fund managers, and on and on supposedly fight for client dollars. Not all of them beat the market in any given year. But even when they fail to win, they often win — sometimes by charging fees on assets managed, not just on earnings. It’s a market gone wrong, and one that investors in some cases seem to have gotten fed up with, as evidenced by the turn against hedge funds.
So yes, gawk at the big Pimco numbers, numbers the firm is disputing, I suppose I should note. But if you are an Allianz shareholder or a Pimco investor, don’t just gawk. Get angry. That’s your money they’re giving away.