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Does high CEO pay hurt banks’ shareholders?

By David Floyd for Kapitall

On Friday, The Wall Street Journal published a graphic analyzing CEO compensation figures for some of the US's largest banks. The post compared CEOs' pay to the average employee's at each bank, and showed how these numbers have changed since 2006. For all of the banks included- JPMorgan Chase ( JPM ), Morgan Stanley ( MS ), Citigroup ( C ), Bank of America ( BAC ) and Goldman Sachs ( GS )-CEO pay took a huge cut following the financial crisis and has partially, but not fully recovered since. Meanwhile the average employee's pay has fallen at Goldman, skyrocketed at Bank of America and stagnated at Morgan Stanley, Citi and JPMorgan.

But what really calls the reader's attention is the ratios of CEO to average employee pay. In 2006, Citi's Charles Prince earned 237 times the average underling, and his successor Vikram Pandit earned even more-both in absolute terms and relative to the average employee-in 2007. That's right about the time that Robert Reich penned an op-ed in the WSJ titled, "CEOs deserve their pay." A year later, the financial world collapsed.

CEOs took an almost certainly deserved pay cut, but Mr. Pandit's succesor at Citi, Michael Corbat, still earns 131 times what the average Citi employee does. And they're making over $99,000 a year. You can put away the calculator: Mr. Corbat earned $13 million in 2014.

The political battle over income inequality in the US has raged for decades. Financial sectors CEOs' compensation in the lead-up and aftermath of the financial crisis has been a focal point, and Warren Buffett has famously weighed in on behalf of the Occupy crowd, urging politicians to raise taxes on plutocrats like himself.

But our question is this: what do these gaps between CEOs' and other employees' pay mean to investors?

We compared these five bank stocks' one-year returns with ratios of CEO to average pay. There was a -43.44 percent correlation between the two, meaning that the bigger the gap, the worse the situation for shareholders. Of course this is a small sample, but so is the number of banks in the world with $100-billion market capitalizations. It is also only a correlation, which does not prove a causal link.

On the other hand, there is a positive correlation of 69 percent between absolute CEO pay and positive stock performance. So paying your CEO an incomprehensible amount doesn't hurt. It might even help. What could hurt is paying him-these five are all hims-too much compared to other employees.

Click on the interactive chart to view data over time.

1. Bank of America ( BAC , Earnings , Analysts , Financials ): 1. Bank of America Corporation ( BAC ): Provides banking and financial services to individuals, small- and middle-market businesses, corporations, and governments primarily in the United States and internationally. Market cap at $163.49B, most recent closing price at $15.54.

Bank of America CEO Brian Moynihan earned $13.0 million in 2014, 86 times the company's average employee compensation, at $150,835. In 2006, Ken Lewis earned 287 times what the average BofA employee made.

Bank of America's 1-year return stands at -7.3 percent.

2. Citigroup ( C , Earnings , Analysts , Financials ): 2. Citigroup Inc. ( C ): Provides consumers, corporations, governments, and institutions with a range of financial products and services. Market cap at $157.39B, most recent closing price at $51.86.

Citigroup CEO Michael Corbat earned $13.0 million in 2014, 131 times the company's average employee compensation, at $99,415. In 2006, Charles Prince earned 273 times what the average Citi employee made.

Citigroups's 1-year return stands at 9.7 percent.

3. The Goldman Sachs Group Inc. ( GS , Earnings , Analysts , Financials ): 3. The Goldman Sachs Group Inc. ( GS ): Provides investment banking, securities, and investment management services to corporations, financial institutions, governments, and high-net-worth individuals worldwide. Market cap at $83.44B, most recent closing price at $191.55.

Goldman Sachs CEO Lloyd Blankfein earned $24.0 million in 2014, 64 times the company's average employee compensation, at $373,265. In 2006, Blankfein earned 103 times what the average Goldman employee made.

Goldman Sach's 1-year return stands at 17.4 percent.

4. JPMorgan Chase & Co. ( JPM , Earnings , Analysts , Financials ): 4. JPMorgan Chase & Co. ( JPM ): Provides various financial services worldwide. Market cap at $225.64B, most recent closing price at $60.52.

JPMorgan Chase CEO James Dimon earned $20.0 million in 2014, 160 times the company's average employee compensation, at $124,959. In 2006, Dimon earned 222 times what the average JPMorgan employee made.

JPMorgan Chase's 1-year return stands at 1.1 percent.

5. Morgan Stanley ( MS , Earnings , Analysts , Financials ): 5. Morgan Stanley ( MS ): Provides various financial products and services to corporations, governments, financial institutions, and individuals worldwide. Market cap at $71.10B, most recent closing price at $36.06.

Morgan Stanley CEO James Gorman earned $22.5 million in 2014, 70 times the company's average employee compensation, at $319,415. In 2006, John Mack earned 131 times what the average Morgan Stanley employee made.

Morgan Stanley's 1-year return stands at 18.2 percent.

(List compiled by David Floyd. Monthly returns data sourced from Zacks Investment Research. All other data sourced from FINVIZ.)

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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