by Jerome a Paris
Sat Jan 31st, 2009 at 09:27:23 AM EST
Back in 2005, I discussed an article from that Financial Times which noted that overpaid bankers were "the poster boys for the left" as "no other industry asks shareholders to take on the bulk of risks, while it gives half of all revenues to employees."
As the graph shows (from this WSJ article, bankers manage to capture more than half of the surplus of banks in good times, and to extract some (ie causing losses to their employers) in bad times.
As the debate rages on as to adequate compensation for bankers, let me repost here what I wrote 4 years ago:
As an investment banker myself, I know how easy it is to claim that I "made" x million for my bank, when I am just one - visible - cog in a big machinery that has decided that it was willing to rent the resource it plays with (money) in a given sector or to certain kinds of clients. So my claim to value viz. the client is that I have the ability to convince my employer to provide large chunks of that resource to such client, and when dealing with such large discrete bits of the resource (say 50 million at a time), the corresponding remuneration that I can claim responsibility for, as the tip of the machinery in contact with the client (say 1%) appears very large, and it's easy to say that a small piece of it should really go to me.
And it's true that I have some leeway with the client. I don't create value (well, I do, but maybe not that much), but I can allocate a lot of it between the client and the bank very easily, in ways that are very hard for anybody else to control, and the best way for the bank to make sure that it gets a fair chunk of it is to give me some incentive to do so. So I benefit from (i) dealing with large amounts (anything below a million is chump change), (ii) being very specialised (and thus harder to replace), (iii) being on the front line with the client (thus able to influence outcomes and claim credit) and (iv) actually getting deals done (hey, give us a little bit of credit!).
In other words, it is structurally easy for the people that have their hands on the money tap to claim that they are the almost-exclusive reason money is flowing. Thus bonuses will always tend to inflate as long as money flows (obviously today is a bit different in that respect), and it is never going to be easy to limit them, barring highly unusual circumstances, which may or may not last.
Which means that the solution has to be somewhere else: in tax policy. Bonuses (to be defined as all compensation received by bankers or licenced financiers beyond their salary should be specifically subject to very high marginal rates above certain thereshholds. That would limit the incentive to go for massively inflated numbers. It's the only way, in fact, and it will have the nice side effect of limiting the "arms race" with CEOs and other highly paid management, and of generating income for government.