Annals of income inequality, Pimco edition

Barry Ritholtz has a blockbuster of a story today, with detailed 2013 pay figures for senior Pimco employees. The top of the food chain, that year, looked something like this*:

Bill Gross: $290 million
Mohamed El-Erian: $230 million
Daniel Ivascyn: $70 million
Wendy Cupps: $50 million
Douglas Hodge: $45 million
Jay Jacobs: $22 million

All of these sums, according to Ritholtz, came out of a $1.5 billion bonus pool which was split between 60 managing directors.

Obviously, the numbers here are mind-bogglingly enormous. But on top of that, they’re incredibly skewed towards the very, very top of the income distribution, in a perfectly Piketty-like manner.

Think about it this way: The 60 managing directors constitute the top 8% of Pimco’s 750 investment professionals. They’re already the elite. And once you become a managing director, you’re golden: the average MD made $25 million in 2013. But in fact there’s really no such thing as the average MD, at Pimco. Of the 60 MDs, only five (Gross, El-Erian, Ivascyn, Cupps, and Hodge) made more than average. The other 55 all made less than average.

Sliced another way, the top two highest-paid employees, Gross and El-Erian, made $520 million between them. They’re 3% of the managing directors and 0.3% of the firm’s investment professionals, but they got 35% of the bonus pool.

The glaring question here is this: why is Pimco’s salary distribution so skewed? Pimco has a very sweet deal going: its managing directors get to keep 30% of all the firm’s profits. But once they get that money, the way that they distribute it is up to them.

They could, for instance, spread it around more widely, and divert a chunk of it to the other 690 investment professionals, or even give nice bonuses to the 2,000 employees more generally. A $1.5 billion bonus pool split between 2,000 people works out to three quarters of a million dollars per person: we’re talking real money, here.

Instead, however, it seems that the bonus pool is reserved for managing directors: the top 3% of the firm’s employees. And even within that select group, as we’ve seen, there’s incredible levels of income inequality.

It’s possible to construct some kind of ex post rationalization of highly unequal pay packages. Why do CEOs get massive contracts? One reason is that they have higher than normal levels of job insecurity: they might get paid a lot while they have the job, but they might not have the job all that long. Another reason is the brass ring idea: by paying the CEO enormous amounts of money, you’re not incentivizing the CEO, so much as you’re incentivizing everybody below the CEO to aspire to reach that position and work incredibly hard to get there.

Neither of these rationalizations works in the case of Bill Gross. He was comfortably ensconced at the helm of the firm that he founded; it took years of erratic behavior and subpar investment returns for him to finally get ejected. And precisely because he was so entrenched in his position, no one at Pimco was under any illusions that they might one day take his job.

The case of El-Erian is also odd. He surely took a pay cut when he moved from Pimco to Harvard in 2005; he has frequently offered himself for the relatively low-paid job of IMF managing director; and he is quite persuasive when he says that the reason he rejoined Pimco in 2007 was about family and climate, rather than money. There’s very little reason to believe that Pimco needed to pay him $230 million a year to retain him; indeed, it would make sense that one of the reasons he found it quite easy to quit Pimco is precisely that he had been paid so much money already that he never needs to earn any more.

So, what does explain the salaries? To say that they’re a function of “each person’s equity stake” is really just reframing the question, more than it is providing an answer: why did Pimco give people like El-Erian and Cupps such large equity stakes in itself, or pay them so much money that they could afford to buy such large equity stakes?

There are only two real explanations that I can think of, and they’re related. The first is that extreme levels of inequality are, as Thomas Piketty says, the natural order of things. The rich get richer, inequality generally grows rather than shrinks, and invariably you see distributions like this one appear quite naturally.

And then the second explanation is old-fashioned greed. The people at the top control the distribution, and take as much as they can for themselves. No senior executive will admit to such a motive, of course — but it has to be said that distributions like this one are entirely consistent with it, and are quite common, especially in buy-side financial institutions like Pimco, or hedge funds, or private-equity funds. Maybe, in a sense, it would be more surprising if a place like Pimco was not governed by greed.

*Official disclaimer: Pimco says that these numbers are “not correct”. You can take that for what it’s worth, which isn’t much.

Felix Salmon is a senior editor at Fusion