Apollo's CEO Leon Black
Jonathan Alcorn/Bloomberg—Getty Images
By Stephen Gandel
August 7, 2014

Leon Black, last year’s highest paid private equity executive, isn’t backing away from handing out big pay checks, even if his firm’s performance doesn’t seem to justify it.

Black’s shareholders haven’t been as fortunate.

Yesterday, Black’s investment management company, Apollo Global Management, announced earnings for the second three months of the year. It was not a great quarter.

Realized gains from Apollo’s private equity business dropped to just under $200 million from nearly $750 million in the second quarter a year ago. In all, its PE funds were up around 5%. The S&P 500 rose 5% during the same period.

Bad quarters happen. And Black has said that he’s not going to rush to sell companies just to produce profits when he thinks he can get a better price down the road. Fair enough. But while shareholders are being asked to wait, employees aren’t.

Despite the disappointing results, Apollo (APO) upped what it paid its employees in cash and benefits by $20 million in the quarter, up nearly 30% from a year ago. And while the profits from its funds decreased, it reserved a larger portion of those smaller profits for its employees. Just over $160 million of the firm’s profits went to employees, up $33 million from the year before.

In all, profits at the firm, even when you calculate them the way Apollo prefers—meaning, we are already bending accounting rules here—were down $13 million in the quarter. The firm was forced to cut its dividend for the quarter by more than a third from the previous year. Shares of Apollo have fallen nearly 17% this year.

To be sure, publicly traded PE firms have a tough line to walk. They have investors in their funds and they have shareholders. Both want a return on their money. And the firms have to figure out how to best compensate their employees to produce returns for both groups. Offer big incentives for high performing funds, and shareholders might lose out.

But when neither investors nor shareholders seem to be getting a particularly good deal, that should raise some serious questions about a firm’s pay practices.

The biggest pay increase in the quarter went to managers of the firm’s credit funds. The firm’s largest credit strategy was up a solid, but not outstanding, 5% in the first six months of the year. That was much better than a year ago, when it was down 3%. Another Apollo credit fund was up an impressive 19% in the first half of the year.

Black has faced criticism of his performance in the past. In June, a Moody’s report found that in the past seven years Apollo had had more troubled deals than any other major private equity firm during the same period. Moody’s said that 12 of the companies that Apollo has bought in its PE funds during that time had ended up in bankruptcy or had defaulted on its bonds. Bain and Carlyle (CG), the two firms with next largest number of busted deals, had seven each. Apollo said the study was flawed.

Last year, Black received $546.3 million in dividends, investment proceeds, and compensation. Apollo says that not all of that pay should be considered compensation.

Apollo did not return a request for comment for this article.

Wall Street firms like to tout their flexible pay system. It’s how they justify big bonuses in the good years. It’s pure capitalism, they say. And they say it’s how they hold their employees accountable for their work. But in practice, it never seems to work. Wall Street pay seems to only go in one direction: up. And Apollo just offers yet another example of that problem.

Editor’s note: An earlier version of this story mistakenly referred to a publicly traded Apollo-sponsored credit fund as the firm’s largest debt offering. That fund was up 6% for the first six months of 2014. In fact, Apollo’s largest internally managed credit strategy was up by 5% for the first six months of 2014.

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