I’m not sure that I’m as excited as Navin Johnson was when the new phone books were delivered — https://www.youtube.com/watch?v=-7aIf1YnbbU – but I was pretty happy when FINRA published its 2014 Year in Review and Financial Report. That’s because, at a minimum, I get to enjoy the part where it reveals the compensation paid to its senior management. Here’s what this year’s Report states the “Top Ten” at FINRA will earn in 2015:

• Rick Ketchum – Chairman and CEO: $1,000,000 salary plus $1,500,000 in incentive comp for a total of $2,500,000
•  Todd Diganci – EVP and CFO: $550,000 salary plus $700,000 in incentive comp for a total of $1,250,000
•  Steven Randich – EVP and CIO: $500,000 salary plus $565,000 in incentive comp for a total of $1,065,000
•  Robert Colby – EVP and Chief Legal Officer: $500,000 salary plus $525,000 in incentive comp for a total of $1,025,000
•  Susan Axelrod – EVP, Regulatory Operations: $450,000 salary plus $500,000 in incentive comp for a total of $950,000
•  Brad Bennett – EVP, Enforcement: $435,000 salary plus $490,000 in incentive comp for a total of $925,000
•  Tom Gira – EVP, Market Regulation: $425,000 salary plus $500,000 in incentive comp for a total of $925,000
•  Steven Joachim – EVP, Transparency Services: $400,000 salary plus $475,000 in incentive comp for a total of $875,000
•  Gregory Ahern – EVP, Corporate Communications and Government Relations: $400,000 salary plus $410,000 in incentive comp for a total of $810,000
•  Cam Funkhouser – EVP, Office of Fraud Detection and Market Intelligence: $375,000 in salary plus $420,000 in incentive comp for a total of $795,000

These figures are determined by the Management Compensation Committee, comprised of four public members of FINRA’s Board of Governors. To justify their compensation determinations, the Committee states that it abides by the following “philosophy”:

FINRA’s compensation philosophy is a pay-for-performance model that seeks to achieve pay levels in line with the competitive market while meeting the objectives of attracting, developing and retaining high-performing individuals who are capable of achieving our mission, and to provide rewards commensurate with individual contributions and FINRA’s overall performance.

Ah, but what market is “competitive” with FINRA? That is a very thorny question, one that the Committee itself acknowledges:

Defining the relevant employment market for competitive compensation benchmarking purposes is a significant challenge for FINRA due to the scarcity of natural comparisons, the uniqueness of functions performed, the need for specialized expertise in financial services and securities law and a constantly changing environment under heightened scrutiny.

Given that challenge, the Committee explains that “[a] number of external sources are leveraged to compile market data to establish these structures. FINRA uses specific position survey data to evaluate skill sets and benchmarks the compensation paid to internal talent to determine whether compensation is comparable to the price that those skills would command on the open market.” They do not explain what those “external sources” are, but, helpfully, they do acknowledge that “FINRA has determined that its competitive compensation positioning for all employees should be considered against a broad section of financial services and capital market companies, as this sector is the most likely from which FINRA will recruit talent, and that would recruit talent away from the Company.” Moreover, “FINRA also benchmarks against general industry positions and law departments for jobs that are not unique to the financial services industry.”

This all sounds amazing. Thoughtful. Logical. Sensible. The problem is, when you tell the average FINRA member firm just how much the senior managers of FINRA – a not-for-profit entity, mind you – earn, with money derived from the assessments the members pay, they go nuts. I am not saying that FINRA employees, at any level, don’t earn their money; but, I am saying that when the Management Compensation Committee is looking for benchmarks against which to measure the fairness and reasonableness of the compensation packages it is offering to senior management, it is abundantly clear that the Committee is not using the “typical” FINRA member firm as the comparator.

These days, many small firms are simply struggling to survive. The hugely increased cost of compliance, necessitated by an onslaught of new rules, and dealing with enforcement-oriented teams of examiners and their serial requests for documents and information, is just too much for many firms to bear. It is a shock to absolutely no one that the number of FINRA member firms continues to contract. According to FINRA statistics, as of May 2015, there were 4,038 members. That is down from 4,578 in 2010, and from 5,111 in 2005. Over ten years, that represents a drop of over 20%.[1] Anecdotally, at least, this plunge in members is due to the difficulty of eeking out a profit, given the financial commitment it takes to pacify the regulators. To see FINRA pay its managers as much as it does, in an environment that has caused firm after firm to close its doors because they couldn’t make enough money to survive, is downright offensive to many members.

[1] In a curious coincidence, in 2005, NASD’s total expenses were $652.5 million (of which $352.5 million, or about 54%, represented compensation and benefits), while in 2015, that same exact figure — $652.5 million – represented only the compensation and benefits portion of the total expenses. The total expenses in 2015 comes to $968.4 million, so the amounts FINRA paid, and is paying, in compensation and benefits has climbed to about 67% of FINRA’s overall expenses. Slicing this data a little differently: in a ten-year period, FINRA’s expenses climbed 48%, while the number of member firms it regulates dropped over 20%. Hmmm.