Myths about Wall Street pay days

http://www.washingtonpost.com/wp-dyn/content/article/2009/10/23/AR2009102302414.html?referrer=facebook

by cwan • 17 years ago

7 19 17 years ago

washingtonpost.com

wynand• 17 years ago

"With the job market like it is, Wall Street doesn't need to pay huge bonuses to retain key people."

Excuse the trollish appearance of this remark, but it's something that I've been wondering about for a long time...

The world to me seems to be brimming with talented people - more than enough to fill trading firms many times over.

What makes these individuals so special to warrant such huge salaries? If it's not survivorship bias, then what is it?

It could be that I just don't want to admit the reality, but if it is, please tell me why I'm wrong (preferably if you're impartial to the financial world).

pchristensen• 17 years ago

Lots of churn brings people in and out, and the potential for high salaries act as a beacon that draws many talented people to the industry who would otherwise have done something more fulfilling. They're much more about recruiting and marketing than rewarding performance.

See also Freakonomics about drug dealers and McDonalds for a more detailed explanation.

dtap• 17 years ago

While there a lot of talented people, there are few extremely talented people. It is these extremely talented people who make the huge salaries. I am at a top 5 business school now and you can definitely see the future millionaires.

Generally, there are a lot of people who go into finance and will make $65-70k and never get into the extreme. But there are people who are going to make $200k+ out of undergrad and likely earn millions someday. They are worth it, many already manage their own money in excess of half a mil.

In a class of 300 top students, I think there are 2-3 of these people.

thetrumanshow• 17 years ago

I kind of see the value of raw talent/intelligence as approaching a limit. Like this graph: http://www.mar.dfo-mpo.gc.ca/science/acon/GIFs/data_dialog3_...

The commenter's idea seems to sync with this notion, as the really talented people kind of group near the top of the curve. This would mean that they are all intelligent/talented enough to master eachother's job.

I bet there is a great deal of luck involved in the outlier cases... which you seem to be attributing to talent alone.

RyanMcGreal• 17 years ago

> What makes these individuals so special to warrant such huge salaries?

Competition for executive positions is a classic winner-take-all market.

http://www.thefreelibrary.com/It%27s+a+winner-take-all+marke...

potatolicious• 17 years ago

Because unlike, say, rocket science, painting, music, or programming, banking is a largely unfulfilling, yet incredibly stressful job. Without the gigantic and absurd financial incentives there's really no reason to get into it.

I went to school in engineering and knew more than a few people who went to Wall Street because of the pay (and social status, since our society worships bankers and the ground upon which they tread). I'm not proud to admit it, but there was schadenfreude when the banking industry collapsed - most of these engineers-gone-Wall-Street are still as of yet unemployed. They spent their time dreaming about big money and not enough on, oh, being capable engineers... so now they're stuck up shit creek.

jwesley• 17 years ago

"Talent" in finance is not equal to raw skill and intelligence. A great deal of an bank employee's value is connections across the finance industry and access to inside information. While there are many highly intelligent people in the world, there are very few who have the requisite experience and domain expertise within different segments of the finance industry to attract millions (possibly billions) of dollars in new business to their company or make a similar amount trading.

kp212• 17 years ago

What a joke. I can't believe someone would actually go out and say, "In a number of cases, however, these risk-management systems were totally inadequate in the face of the market tsunami that enveloped mortgage-backed securities after home prices began to drop in 2006. The storm carried away several firms, but others performed well despite the difficulties. It wasn't the bonuses that brought everything down; it was a combination of many things, some sloppy or foolish, and most far more important than bonus checks. " as a justification for the bonuses. *Guess he forgot the fact we bailed out Citi and AIG, I guess he forgot the fact we are on the hook for that, not the firms who had the so called," these risk-management systems were totally inadequate in the face of the market tsunami". The people that built these inadequate systems still for the most part have a job, and from what I read last month the bonuses are back.

Update - Just checked out his bio, Harvard MBA, career at Goldman Sachs, definitely not part of the boys club, riiight.

rauljara• 17 years ago

This article doesn't really seem to acknowledge the fact that many executives have, and continue to be, compensated incredibly well for very incredibly poor performance. If the system that most companies have right now were working, that wouldn't be the case. Compensation is so high that people latch on to any reason they can find to justify it, otherwise they have to admit that they are giving people millions of dollars they don't need to.

The argument the argument makes that companies need to pay so much money to maintain top talent seems like an argument in favor of regulation. If compensation were capped and merely exorbitant levels, perhaps it would be easier for companies to retain their talent. But a bigger benefit would be that companies would have an easier time telling who their top talent is, because they would not have to go through the psychologically painful process of admitting that they could have found another talented person for significantly less.

fizx• 17 years ago

> This article doesn't really seem to acknowledge the fact that many executives have, and continue to be, compensated incredibly well for very incredibly poor performance.

Think of it like being the coach of the St. Louis Rams. Your team performs poorly, and you get paid well. Ultimately, if it's your fault, firing makes more sense than a pay cut.

> The argument the argument makes that companies need to pay so much money to maintain top talent seems like an argument in favor of regulation.

If there's a salary cap, then they might lose some top talent to startups (or the legal profession, or ...).

Devil's advocate.

byrneseyeview2• 17 years ago

If Wall Street executives are truly overpaid for the profit they produce, you don't have to complain -- you can just profit from it! Simply short Goldman Sachs (which pays its employees far more than anyone else) and buy shares of a smaller bank.

That way, instead of feeling like the world is unjust, you can feel like there are popular misconceptions which you can simultaneously profit from (when Goldman's price drops because it's overpaying employees) and alleviate (Goldman drops when you short it; the bank whose shares you buy goes up).

And of course, you get a boost to your argument. It's going to sound less like "I resent people who can make more money than me," and more like "I think there's an economic inefficiency here -- and I'm prepared to stake money on whether or not I'm right."

bokonist• 17 years ago

The problem is that Wall St. makes money by taking big risks and passing the losses on to the taxpayers. What would Goldman's profits be without the TARP bailout and the AIG bailout? I suspect Goldman would not have survived.

Of course, the solution is not to regulate pay, but to allow the big banks to fail ( I think the whole too big to fail argument is a lot of hooey, there a lot of ways to allow a bank to fail without causing contagious destruction).

anamax• 17 years ago

> The argument the argument makes that companies need to pay so much money to maintain top talent seems like an argument in favor of regulation.

Oh really? How is the US govt going to regulate what a Chinese bank pays?

You clearly believe that bankers could be paid less and deliver comparable results. Great! Set up a bank and prove it. If you're correct, you'll get rich, which will let you do other good, and you'll drive stupid banks out of biz.

btilly• 17 years ago

You're confusing completely separate issues.

Executive compensation is the issue of outrageous salaries paid to the CEO and top few individuals in a company. As a culture we've come to forget the the CEO of a public company is generally a caretaker, not an owner. And complications around corporate governance make it hard for shareholders to make their ire felt.

Wall St bonuses is the result of a culture that has arisen among very performance driven people who deal with large sums of money. Because you want them to perform, and can measure performance, you want to reward them for their performance. Which means paying salary, not bonuses. Because they regularly handle large amounts of money you want them to be honest. Which means you need to reward them well enough to make them hard to bribe. This naturally leads to outrageous amounts of compensation, which is largely delivered as bonuses.

So the first issue is a case of widespread poor corporate governance, while the second issue is a very unequal, but economically efficient, way to operate in certain lines of business.

Kadin• 17 years ago

> compensated incredibly well for very incredibly poor performance

Sort of. They tend to be compensated well, right up until they're fired. The analogy someone else made to sports coaches is an apt one; if a team loses a few games, the coach doesn't get his pay docked, but if a team loses for a few seasons, chances are he'll just be out of a job.

Plus, in many cases it can be hard to determine whether a CEO's actions led directly to a poor quarter, or if it was just a bad quarter and they handled things appropriately. And if pay was tied directly to financial metrics, there would be an incentive to play the numbers game.

It's important also to remember that the people determining a CEO's salary -- or at least giving it the thumbs-up -- are typically the biggest owners of a company; the CEO's pay comes out of their pockets in greater proportion than it does anyone else's. If they think that their CEO is doing a ten-million-dollar a year job, who is anyone else to argue? If they thought they could get someone to do the same job at half the salary, doubtless they'd do it; I doubt they enjoy spending that much, but they think it's necessary.

jfoutz• 17 years ago

1. The Wall Street bonus culture led to the financial crisis. "The crisis was caused by a combination of lax monetary policy, loose regulation..., ... institutional investors ... global banking industry..."

Aside from lax monetary policy, these causes are only exacerbated by huge bonuses.

2. Wall Street is totally indifferent to Main Street.

Yeah... looking down main street I don't see a lot of large corporations or financial institutions ready to trade. Swing by BofA and pick up a small business loan. Not that they should be. and investor's job is to find the best possible deal. maybe it's no main street, maybe not. but technically you ought to be indifferent if you're good at investing.

3. With the job market like it is, Wall Street doesn't need to pay huge bonuses to retain key people.

If you can't figure out what <key person> does to make all that money, you are not smart enough to keep that money. Since you are not smart enough, why don't the taxpayers just fund <key person> instead? What are you bringing to the table? phones and bloomberg terminals?

4. Wall Street will never restrict its own pay. Yes, clearly with all the laws and contracts requiring it, wall street will restrict its own pay.

5. Wall Street pay is so out of line, only the government can fix it.

The first goddamn argument was "lax regulation" WTF?

Myths about Wall Street pay days

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