Saturday, February 7, 2009

Ending the scandal of top pay

Obama's decision to impose a $500,000 wage ceiling on bailed-out bankers has caused some concern in the banking community. The FT reports:

“The cap is a lousy idea,” complained one top Wall Street executive. “If there is no monetary upside, who would want to do these jobs? Executives will just move to private equity and hedge funds”.

Have I missed something? Who would want to do these jobs at only $500,000 plus bonuses (albeit deferred)? Well, maybe some of the executives used to earning $20 million may not want to do these jobs, but given what has just happened - the banks losing more than they have made in profit over decades in just six months - perhaps that's the kind of talent we can do without.

The notion that multimillion dollar packages are necessary to attract talent is so boneheaded it is hardly worth taking on. The genius bankers who accumulated trillions in worthless paper and bankrupted the system did not walk off the street straight into CEO jobs, but instead worked at much lower salaries for years before making the $1.2 million corner office. So even if we assume these people are (were) the best, the logic still doesn't hold because they committed to a banking career when the rewards were much lower.

Here an analogy from another world of fast-growing gains at the top - soccer - can help make the point. 10 years ago top Premiership footballers could command basic pay of around £50,000 a week. Now, the top players get 3-4 times that. Would Cristiano Ronaldo not have bothered becoming a professional footballer if he had thought he would be earning £50,000 pounds a week rather than £150,000? Once you're very rich, there are surely diminishing marginal utility gains from extra income.

And let's not forget that even in the world of finance, most employees earn significantly less than half a million dollars. The idea that there is no-one competent in the banking system who would get out of bed for $500,000 is just too ridiculous. If this is what these people really think, then they are even dumber and more venal than we thought.