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If you thought CEOs were overpaid -- with average compensation of $14 million last year at companies in the S&P 500 Index -- brace yourself for an even bigger shock.
For the first time, we're getting a glimpse of how much top money managers in the rarified world of private-equity investment rake in. They're now revealing their personal earnings because their firms are going public, and the numbers are breathtaking.
For example, check out how much loot they make at the helm of the Blackstone Group (BX, news, msgs), which began trading Friday on the New York Stock Exchange in one of the largest-ever public offerings. The IPO priced Thursday at $31, the top of its expected range, and zoomed to $37 at the open on Friday.
- Stephen Schwarzman, a Blackstone founder and its chief executive, took in a cool $398 million last year. That was his share of the company's profit. He'll get $677 million when he sells Blackstone shares in the IPO (at $31 a share). And he'll still have an estimated $7.7 billion stake in the company.
- Blackstone co-founder and Chairman Peter Peterson, who was commerce secretary under Richard Nixon, got $213 million as his share of last year's profit. He'll get $1.9 billion for the stock he sells in the IPO. Afterward, he'll still have a $1.4 billion stake in the company.
- Hamilton James, Blackstone's president and chief operating officer, got $97 million in profit last year. He'll get $22 million for the stock he'll sell in the IPO, and he'll still have a $1.6 billion stake in the company.
| 2006 earnings* | Stake in company** | |
|---|---|---|
| Blackstone | ||
| Stephen Schwarzman, founder and chief executive | $398 million | $7.7 billion |
| Peter Peterson, founder and chairman | $213 million | $1.4 billion |
| Hamilton James, chief operating officer | $97 million | $1.6 billion |
| Fortress Group | ||
| Wesley Edens, principal executive officer | $109 million | $1.8 billion |
| Michael Novogratz, president | $104 million | $1.6 billion |
| Peter Briger, president | $97 million | $1.6 billion |
| Randal Nardone, chief operating officer | $70 million | $1.3 billion |
| Robert Kauffman, president for Europe | $66 million | $1.3 billion |
*Each managers' share of profits for the year
**Estimated value of shares after the initial public offering
Sources: company documents and calculations by Michael Brush
"These numbers demonstrate the vast inequity of wealth in this country, and they are driving a huge political divide that will become an election issue," says Rich Ferlauto, the director of pension and benefit policy for the American Federation of State, County and Municipal Employees, a union for government workers.
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The $449 million to $677 million that Schwarzman will get when he cashes in some Blackstone shares is about 7,600 to 11,500 times the average household pay in this country, which was $58,712 in 2005. And that's only part of his reward this year; he'll get his share of investing profits, too.
Of course, you might think that such comparisons aren't strictly fair because Schwarzman has to pay millions in taxes on all that money. But that's another shocker: Even though Schwarzman makes such huge sums of money, he likely pays taxes at a much lower rate than you do. With the legal structure of his investment shop, he gets taxed at a 15% rate on his income because it comes in the form of distributed capital gains from an investment partnership. In contrast, most workers pay 25% to 35% of their income in taxes.
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The Blackstone IPOThe company's initial public offering is a big story on Wall Street, and investors wonder whether it will change the private-equity game.
"The person serving Schwarzman drinks at his poolside is probably paying a higher percentage of his income in taxes than Schwarzman," says Daniel Pedrotty, a corporate-governance expert at the AFL-CIO's office of investment. "It offends us that these money managers are paying a lower tax rate than our members, who are coal miners or rank-and-file blue-collar workers. It shouldn't be the position of the U.S. government to redistribute wealth in favor of wealthy people."
Continued: Changes on the horizon
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