The greedy, testosterone-driven Wall Streeter, and their overpaid CEOs, bringing down our financial system has become a popular canard. I take rides on that bandwagon now and then. They’re an easy target, and it helps me justify my career choices. And doggoneit, it just feels good.
Although we might grumble about overpaid CEOs and hedge fund managers, I have to admit that income disparity in the financial sector is small compared to my current sector, the internet. One need look no further than Brin and Page at Google, worth at this moment about $30BB, 20% of Google’s market valuation, or 30% of all of Google’s revenue since its inception. Much hay is being made over Fuld’s $500MM in compensation since 2000. That’s not much compared to Brin and Page, and considering that Lehman had substantially more revenue than Google ($60BB in 2007). Nor is a significant fraction of the increase in enterprise value at Lehman during his tenure. I’m not knocking Google, every startup I’ve worked for, including Daylife, has had a similar option grant strategy. Let’s just get the charges right on Fuld and his kin.
Why do we rail against greedy Wall Streeters, when they’re no greedier than anyone else? For one thing, their product is not clearly visible, whereas anyone can see Google’s contribution. They’re highly paid middle-men. But then, isn’t Google a middle-man between you and the web pages you want? One increases access to the web, the other access to capital. The only other difference I can see is that Wall Street has a lot of negative cultural baggage that dates back to the robber-barons of the late 19th century, who were genuinely ruthless. Not so with high-tech startups, and Brin and Page have a friendlier and more humble demeanor than Fuld.
So lets not excoriate Fuld and company because of their greed or their salaries, or the apparent uselessness of their field. Hate them because they did not fully understand the business they were in or foresee conditions that would lead to the failure of their company. Or if they’re arbitrage traders, hate them because they really are parasites that contribute little to society.
Those are the only negatives I’ve come up with. One positive thing I’ll say about investment banks and hedge funds, they have done an excellent job of attracting talent over the last decade or two. Better than Google. The field is full of interesting problems, although they lack the social relevance that a company like Daylife enjoys, or indeed Google’s capacity to increase access to information and improve a citizen’s ability to judge properly the actions of their government. They attract talent by paying well, and motivate them by closely linking performance and compensation. The distribution of wealth is also flatter and relatively meritocratic compared to most high-tech companies, driven by bonuses. Internet startups usually try to build the value of the enterprise, to be realized as good will in an acquisition and apportioned to the share holders. Hedge funds, investment banks, and the like generate revenue, and distribute it to investors and employee on an annual basis.
We could learn something there. Traditionally in my field hire grants are sizeable and decline rapidly with time, and annual grants small or non-existent. The decline is a reflection of the risk-reward curve, but in every case I’ve seen, overweights early risk. The truth is that founders and first hires, and in fact everyone involved in the process, reserve for themselves as much of the company as they can manage, without unduly jeopardizing the future of the company. Its the same greed that drives Wall Street and every business, and it happens because everyone, almost universally, overestimates their own importance and contribution.
Is it fair? Certainly. No one is coerced during new hire negotiations. A better question: Is it wise? I think not. Hiring the best people, and as many of them as possible, and motivating them, is the first order of survival. So I suggest skewing towards annual grants instead of hire grants will be better for the company. Use an immediate or one-year cliff vest. It requires annual discussions about compensation, not something everyone is comfortable with, but they should be. It ties compensation more closely to performance. Who after all can really estimate a person’s contribution and hire grant before you’ve seen them in the trenches for a while? It makes more space for high-performers that come on-board after the first batch, and gives them more reason to be high-performers. It is an annual reminder that they are in a risky venture that can fail. Reminders of that risk will be most important after the first few moderate successes and before the liquidity event or you have been weaned off of fund-raising, when it starts to look more like a real company but is not yet self-sustaining. And lastly, keep options high and salaries low for later hires. You want year three to be as energized and risk-aware as year one. It means less options for someone like me, but I’d be working for a better company. It wouldn’t be a pareto improvement in my own risk-reward, but I believe is a better spot on the curve.
Posted by Ken Ellis 
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