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DEREGULATION REDUX 

only . a year during the  years after World War II, lagging companies’ increasing

size. But the rate picked up during the s and rose faster each decade, reaching

 a year from  to . Much of the change reflected higher earnings in the
financial sector, where by  executives’ pay averaged . million annually, the
highest of any industry. Though base salaries differed relatively little across sectors,
banking and finance paid much higher bonuses and awarded more stock. And brokers
and dealers did by far the best, averaging more than  million in compensation. 
Both before and after going public, investment banks typically paid out half their
revenues in compensation. For example, Goldman Sachs spent between  and 
a year between  and , when Morgan Stanley allotted between  and .
Merrill paid out similar percentages in  and , but gave  in —a year
it suffered dramatic losses. 
As the scale, revenue, and profitability of the firms grew, compensation packages
soared for senior executives and other key employees. John Gutfreund, reported to
be the highest-paid executive on Wall Street in the late s, received . million in
 as CEO of Salomon Brothers. Stanley O’Neal’s package was worth more than


 million in , the last full year he was CEO of Merrill Lynch. In , Lloyd

Blankfein, CEO at Goldman Sachs, received . million; Richard Fuld, CEO of
Lehman Brothers, and Jamie Dimon, CEO of JPMorgan Chase, received about 

million and  million, respectively. That year Wall Street paid workers in New

York roughly  billion in year-end bonuses alone. Total compensation for the ma-
jor U.S. banks and securities firms was estimated at  billion. 
Stock options became a popular form of compensation, allowing employees to
buy the company’s stock in the future at some predetermined price, and thus to reap
rewards when the stock price was higher than that predetermined price. In fact, the
option would have no value if the stock price was below that price. Encouraging the
awarding of stock options was  legislation making compensation in excess of 
million taxable to the corporation unless performance-based. Stock options had po-
tentially unlimited upside, while the downside was simply to receive nothing if the
stock didn’t rise to the predetermined price. The same applied to plans that tied pay
to return on equity: they meant that executives could win more than they could lose.
These pay structures had the unintended consequence of creating incentives to in-
crease both risk and leverage, which could lead to larger jumps in a company’s stock
price.
As these options motivated financial firms to take more risk and use more lever-
age, the evolution of the system provided the means. Shadow banking institutions
faced few regulatory constraints on leverage; changes in regulations loosened the
constraints on commercial banks. OTC derivatives allowing for enormous leverage
proliferated. And risk management, thought to be keeping ahead of these develop-
ments, would fail to rein in the increasing risks.
The dangers of the new pay structures were clear, but senior executives believed
they were powerless to change it. Former Citigroup CEO Sandy Weill told the Com-
mission, “I think if you look at the results of what happened on Wall Street, it became,