One of the things that intrigues me about the recent Wall Street bonus payments is that top traders make twice what their CEOs get.

The reason for this is that the CEO and the trader participate in different labor markets characterized by different next-best-alternatives and different levels of performance measurement complexity. Huh? While the CEO of an investment bank's next best alternative job (at least at The Goldman Sachs Group (NYSE:GS)) is to give up money and go for the power and prestige of a government post (e.g., Treasury Secretary), the top trader's next best alternative is to leave the bank and start up a hedge fund. Moreover, a CEO's job is complex and difficult to measure whereas a trader's job is enormously stressful and relatively simple to measure.

At Goldman, for example, CEO Lloyd Blankfein is slated to take home $50 million whereas some traders, such as Morgan Sze, a head trader in Goldman's principal strategies group based in Hong Kong, are rumored to be receiving $100 million. Traders such as Sze are prone to leave to start their own hedge funds where the average of the top 100 made roughly three-and-a-half times his bonus -- or $363 million in 2005. For example, Eric Mindich, a top Goldman trader, left Goldman in November 2004 to start Eton Park Capital Management, with $3 billion under management.

Continue reading Why top traders outearn investment bank CEOs 2:1

Why top traders outearn investment bank CEOs 2:1 originally appeared on BloggingStocks on Mon, 18 Dec 2006 11:52:00 EST. Please see our terms for use of feeds.