Wednesday, December 3, 2008

More on Banker Compensation

Compensation is a hot topic these days. From The Big Picture:

One of the maddening features of the financial crisis has been Wall Street’s constant insistence that without its mind-boggling compensation, talent will go elsewhere. On the face of it, this seems an empty threat from a group of hysterical prima donnas who don’t want to have to suffer the consequences for their actions. We focus a lot on pay for the top few at a public company (my, how that term has a new ring to it after the bailout) because public companies disclose the pay of those at the top.

Felix Salmon is ready to take the plunge:

Andrew Ross Sorkin is worried about what happens if you don't pay bankers enough money:

The trick, of course, is to dole out enough rewards to keep executives working, and working hard, but not to dole out too much...
Citigroup and other firms need to find ways to keep and attract talented people who can make smart decisions, without lavishing pay on them or rewarding them for shoddy performance...
Mr. Pandit and others -- to the extent you believe they are the right leaders of Citigroup -- or whoever takes their roles are unlikely to hang around if they're not amply paid.
The risk, Mr. Johnson said, is that if we taxpayers don't offer the possibility of a payday, we won't get the performance. "If you were in senior management and you knew you'd never get paid, you're not going to work as hard or you'll leave," he said. "It's actually worse if they stay. If you have a bunch of demoralized people hanging around, it will kill you."

I say, let's take the risk, and see what happens. I've now reached the point at which I simply don't believe people when they say that lower pay for bankers will result in worse performance -- especially since it looks very much as though it was higher pay for bankers which was at least partly responsible for much of the present crisis. Let's bring down pay, a lot, and see whether performance really falls.

Angry Bear provides a link to a history of the legislative efforts to limit executive compensation (the short story – meaningful restrictions were not passed).

Finally, Richard Epstein touches on the topic in a very interesting podcast on Happiness, Inequality, and Envy. Epstein believes the reason the wealthy are not measurably happier than others is that they have undertaken jobs whose conditions make them unhappy in exchange for high compensation. Pity the poor investment bankers who have to work 18 hour days and fly to Europe at a moment’s notice to close deals – where would the world be without them? We don’t envy them, because we understand the highly compensated bear a heavy burden. As Epstein notes, nurses don’t envy doctors, but the idea of people not pulling their weight makes us crazy.

I don’t think Epstein has it quite right; I’m with Felix on this one. I had one of those jobs. The work was challenging and felt important, and the people I worked with were interesting. Of course, the hours were long and travel gets old, but nice hotels and five figure closing dinners go a long way towards easing that pain. Is it really necessary to pay mid six figures and up to find good people to make that kind of sacrifice? I think not.

Epstein is right about the “pulling your weight” part. That is precisely why Robert Rubin disclaiming any responsibility for Citigroup’s problems makes people crazy.