Two interesting movements occurred in the most recent Bureau of Labor Statistics’ release of employee compensation in the finance and insurance industries. First is the percentage of total compensation devoted towards wages and salaries and second, average compensation per hour. Which direction would you guess the two are heading?  Are wages and salaries eating up a larger take of the pie?  What about average compensation, do you think it’s going up or down?

Here’s a look.

Salary and Wages as a Percentage of Total Compensation

First, a look at the salary and wage data as a percentage of total compensation.

Interestingly, the series has a long-term downward bias trend.  In early 2004, the percentage of total compensation devoted to salary and wages was 69.4%.

That figure precipitously declined to 64.7% in the second quarter of 2015.  Then, it jumped.  Salary and wage compensation as a percentage of total compensation increased to an amazing 66.6%.

This jump represents the first increase in a while.

What’s behind the jump?

Well, you can guess what you want.  On possible explanation is that firms finally started increasing base salary after years of stagnant wage growth.  In other words, bonus checks will show to have been relatively smaller in 2015 because of base salary growth.  Another possible explanation is that the denominator started decreasing, i.e. benefits and other non-salary compensation declined.

In any event, an interesting move.

percentage of total compensation - salaries and wages

Average Compensation

The next graphic is average compensation.

Fascinatingly, average compensation dropped off, something that hasn’t happened in a while.

Why did average compensation drop off?  Perhaps financial firms are starting to hire younger workers to replace older workers?  Or, perhaps it’s simply an anomaly?

It’s interesting to note how quickly average compensation rose from 2010 to 2015, yet a very different story is exhibited from 2005 to 2010.  Perhaps the run-up is over and the remainder of the economic boom will be akin to the early part of the decade.

cost comp per hour

How Do the BLS Figures Compare to Job Search Digest’s Survey Results?

The BLS’ figures are estimates based upon company filings and provide only an average, or total view for companies in the financial and insurance industries.  Job Search Digest’s data are based upon a survey of private equity and venture capital company representatives and provide lots of interesting detail as it relates to this sector. Here’s a breakdown look at pay by the amount of take-home pay.

Unsurprisingly, bonus pay explodes the higher up the pay scale one goes.  In 2015, individuals making $1 million or more of income earned more than half of their income from bonuses, with an average bonus of $600,000 on top of $500,000 in base pay.

As one moves further  down the pay scale, bonus pay become quite scarce.  At the lowest end – individuals making less than $100,000 per year – bonus pay barely registers.

So, how do the BLS figures align with JSD’s figures?

Well, it appear both figures are pointing to a phenomenon where bonus pay is increasingly concentrated at the top, with base pay becoming an increasingly more important part of the compensation pie for those who earn at the lower end of the spectrum.  Interesting.

Capture

Conclusion

In looking at the recently released figures on employee compensation in the finance and insurance sectors, two interesting “anomalies” shows up. First, the percentage of total compensation devoted to wages and salaries increased, from 64.7% in the second quarter of 2015 to 66.6% in the third quarter of 2015. Second, average compensation per hour dropped in the third quarter of 2015.

What’s behind the moves is up for speculation.  Perhaps the long-awaited retiring of the expensive generation is leading to some cost savings for financial employers?  Perhaps some financial employers are opting to not provide health insurance, which would explain the increase in wage and salary costs as a percentage of the total?

Lots of other potential explanations exist; what’s interesting is that it’s happening.  We’ll see whether the third quarter turns out to be a blip, or a trend.

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When those in the private equity industry talk about carried interest, someone who is not in the know may not understand what is meant by the term, particularly since the word “interest” is generally understood to mean interest payments for a loan. With carried interest, the reality is much different. Carried interest has nothing to do with interest payments.

Ever wonder where the term “carried interest” comes from? It actually goes back to the medieval merchants in Genoa, Pisa, Florence, and Venice. These traders carried cargo on their ships belonging to other people and earned 20% of the profits on the “carried” product.

What Is Carried Interest?

Carried interest is compensation that is received based on performance. The payment has nothing to do with how much capital the manager contributed to the fund. Carried interest is comparable to the stock option compensation that CEOs receive. If the company stock does well, their stock options increase in value. The CEO didn’t pay anything for the option, so they are basically free call options. Carried interest works much the same way. The private equity manager pays nothing for the right to receive the carried interest. If the fund does well, they receive a portion of the profits.

It gets better. Because the profits are related to investments, carried interest is not taxed as regular income. It is taxed as a long-term investment. Why should you care? The maximum tax rate for regular income is about 40%. The maximum rate for long-term capital gains is 20%. Thanks to the tax code, those earning carried interest have their taxes on those earnings cut in half.

This tax treatment has not been without controversy. People who are not beneficiaries of the long-term capital gains tax rates dislike the fact that investment managers might pay a lower tax rate than them, but obviously, those managers are not complaining. It’s just another perk to being employed in the private equity industry.

How Is Carried Interest Structured?

Carried interest is generally 20% of the fund’s profits, but it can be as high as 50% for some elite funds. For starter funds or those suffering from poor performance, carried interest can be in the single digits. Increasing competition in the industry has lowered the average carry rate over the years.

Remember: carried interest is not the only compensation that private equity managers receive. They also charge management fees, which are generally 2%. So even if the fund’s performance is bad for whatever reason, they still get paid.  The 2016 Private Equity/Venture Capital Compensation Report provides information on how carry was actually paid to private equity/venture capital professionals in 2015.

Obviously, the goal is to be a top performer in order to maximize pay and career growth. After all, private equity is hard work. Fund managers are heavily involved in strategy, business development, financial management and restructuring, and operational details. Carry is a huge incentive to make sure great fund managers are compensated for their performance.

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This past week saw one of the most well-known economic indicators – Disposable Personal Income – come in about in line with expectations. With the year almost over, and another presidency about to hit the road, now seems like a good time to take a look at how Disposable Income has performed by presidency.

Before taking a look, which president would you guess saw the best performance in disposable income growth over their presidency?  Which president would you guess is the worst?

Here’s a look.

Personal Income

Before looking at Disposable Personal Income, which takes Personal Income and subtracts out taxes, here’s a look at the broader Personal Income picture by U.S. president.

The chart shows the percentage change in Personal Income throughout the given president’s administration.  The vertical axis is the percentage change on a cumulative basis.  The horizontal axis is the number of months into the presidency.  Each line represents a president.

Interestingly, the best president for Personal Income growth is Reagan.  During his time in office, Personal Income expanded by an astounding 78%.

In distant second and third places are Clinton and Carter, each at 59% (although Clinton served four more years than Carter).

On the other end of the spectrum, Obama is the worst president for Personal Income, with a mere 29% growth for the 7 years he’s been in office.

George W. Bush was marginally better, with Personal Income growth of 38% over his 8 years.  Bush had the unfortunate experience of being president when the housing market and the global financial crisis began.  Most of the effect of the most recent global recession shows up in his final years.

Personal Spending by U.S. President

Disposable Personal Income

Next, to the question at hand – Disposable Personal Income.  Disposable Personal Income takes total Personal Income and subtracts off taxes paid.

Before looking, would you guess that the distribution or line-up of the best and worst U.S. presidents according to Disposable Income changes much from total Personal Income.

Which presidents raised taxes the most?  Which presidents lowered taxes?

Interestingly, the race to the top gets much closer. Overall, Reagan still comes out on top, at 32.9%, followed closely by Clinton at 32.6%. In the Disposable Income view, Johnson gains ground, as does Bush II (W. Bush).  Both presidents cut the tax burden during their time in office.

On the other end, the weakest president is Obama.  Obama has both the broader Total Personal Income as incredibly weak under his watch and the fact that during his time in office he raised taxes by large amounts.  The tax increases explain why Bush II looks much better than Obama.

Disposable Personal Income by U.S. President
Conclusion

Overall, in looking at Disposable Personal Income by U.S. president, some interesting results emerge. When it comes to Disposable Personal Income, the best performing U.S. presidents are Ronald Reagan and Bill Clinton. On the other end, the worst president for Disposable Personal Income is Obama, with DPI up just 13% through his 7 years in office.

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Playing Politics with the Federal Funds Rate

December 14, 2015

If things go as expected, on Wednesday Federal Reserve Chairwoman Janet Yellen will announce the first Fed rate hike in almost a decade (2006 was the last time the Fed increased the federal funds target rate). Since 2006, we’ve seen a peak in the housing market, a collapse in global financial assets, unemployment above 8%, […]

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What Is Going on with the American Consumer?

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Every private equity professional – whether they want to admit it or not – is somewhat of an economist.  Private equity professionals must, by their very nature, follow demographic shifts, economic outlooks, and other economic forces. The force discussed here is the American consumer, typically considered the driving force of the American economy.  This presumption […]

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Could 2015 Mergers and Acquisitions Reach an All Time High?

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The 20 Top Cities for Global Finance

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California Job Creation: Is the PE/VC Connection with Silicon Valley Responsible?

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On usually the first Friday of every month, the Bureau of Labor Statistics (BLS) releases its estimate of net job creation (or destruction) for the nation as a whole.  The figures in the report are perhaps the most influential economic indicators in the world, including estimates on wage growth, unemployment, labor force, and industry job […]

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The U.S. Isn’t Number 1 in Venture Captial Investments

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When you think of venture capital/private equity investing, what’s the first place that comes to mind? If you’re like most, you probably think of Silicon Valley’s tech companies or biotechnology in Massachusetts, as places with a strong venture capital base. You’d be right.  On an absolute dollar basis, venture capital in the United States is still the […]

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3 Reasons the Fed Might Raise Rates in September

September 7, 2015

Unless you’ve actively tried to avoid the conversation, if you work in the financial world, the topic of the  Fed raising rates in September is unavoidable. Everyone has an opinion, which range from relief that the Fed is actually doing something besides providing the spike to the party’s punch, to disgust that the Fed would consider a […]

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