Matt Yglesias, international blogger of mystery, makes a puzzling claim:
©learly the reason bankers pay themselves so much money is that banking firms make so much money. They’re not going to just pile the money up on the roof and light it on fire. Huge finance profits imply huge finance compensation packages.
That’s interesting. So when Exxon or AT&T or Ford have a banner year, overall compensation across a big percentage of employees goes way up? And when Goldman and Citi and BofA make net losses in a given year, nobody gets paid a bonus? I didn’t know that.
Employees at financial services firms take home a bigger percentage of firm earnings than do employees at non-financial firms. That could be because they are genuinely more valuable – possessed of skills that are rarer or harder to replicate than employees at most firms. Or it could be due to exceptionally poor corporate governance at financial institutions. Or it could be due to a substantial relative information advantage that financial services firms employees have in negotiating with their employers as compared with employees at non-financial firms. Or it could be yet another consequence of moral hazard. Or it could be a consequence of the stickiness of compensation arrangements that such arrangements persist even when the conditions that originally justified them no longer obtain (e.g., the transformation of investment banks from partnerships to public companies to subsidiaries of large global banking conglomerates). The point is: there are lots of reasons why bankers get paid so much that don’t imply that this is either cause or consequence of the high absolute level of reported profits in the industry. And if bankers didn’t get paid so much, that wouldn’t mean that they’d set the extra money on fire. It means that a greater percentage of earnings would accrue to shareholders. Remember them?
There’s an old school of thought, in fact, that argues that all or virtually all profits should be paid out to investors in the form of dividends, precisely to prevent insider self-dealing. If you wanted to create a structural check on banker pay, it might make sense to consider requiring banks to do exactly that: pay out their earnings as dividends, in a manner roughly analogous to the way REITs work. If investors received their return primarily in variable dividend form, it would be really transparent how returns were being shared between investors and employees, and that might, perhaps, force real change in the structure of compensation.