We are developing the social individualist meta-context for the future. From the very serious to the extremely frivolous... lets see what is on the mind of the Samizdata people.
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A question about huge Wall St. payments Considering that investment bankers at places like Goldman Sachs and Morgan Stanley are paid the sort of money that sounds like a respectable cricket score, economics writer Arnold Kling asks the question: why is the supply of people to do this job not rising in response to a very juicy lump of money? It is a good question to ask. For the sort of money on offer, even a maths dunce like your humble scribe might want to learn to do the job and start figuring out the the clever-dick arts of hedge funds, credit derivatives and leveraged buyouts. So why is the supply not rising? I think some of this may be caused by a lack of talented folk coming out of our education system, but that cannot really explain it over the long-term. It may be that getting the level of experience to do these jobs is quite high, raising the scarcity and hence the massive rewards. Of course when these guys get fired for failing to perform, this rarely bothers people who get upset about the big salaries.
These guys have a rather, er, different take on the matter.
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While absolute talent is required, I imagine that a large proportion of the remuneration is rewarding /relative/ talent. i.e. in the fund management game it doesn’t matter much how good your people are, it just matters that they’re the best anyone has.
eww! marxist.com. I feel dirty just rolling my mouse over the link to see where it went. I think I need some brain bleach and a shower.
The reason for these huge salaries is not supply and demand of a skill set. It is many-fold and includes tax policy, corporate law, corporate socialism and celebrity culture.
The tax policy part is the largest part, I think, and is due to the U.S. income tax encouraging not taking dividends or other income from businesses you own shares in, but deferring it in favor of possible future capitol gains when the stock is sold, since they are taxed at lower rates. So stockholders do not really think of it as their money going to the CEO, since the stockholders profit comes not from income but from stock price speculation.
Corporate law is set up such that stockholders actually have very little power, unless they are large institutional holders, who have a self interest in perpetuating large CEO salaries, since institutions are in turn run by CEO’s. It is a large, incestuous, feedback loop of a system.
Corporate socialism is what it is. Corporations are basically collectives, and like collectives, they tend to evolve into oligarchies or autocracies, and cults of personality. Bill Gates, Steve Jobs, Sam Walton, Jack Welch, Warren Buffet etc.
This leads into celebrity culture, where the celebrity CEO can do no wrong and is essentially worshipped within the organization. They get away with mediocre decisions so long as they can keep the stock price up. Enron, Tyco, and other company histories attest to this.
The whole idea of corporations, Whether they are a good idea or not, how they are structured and the way they are treated under law, needs to be rethought.
Absent government regulations that enforce the current system, I really doubt they would have evolved this way in a more free market.
I don’t know for certain but I am willing to bet that remuneration in investment banking follows the rock star model.
In the music industry, the vast majority of musicians starve while a tiny handful make huge rewards. That minority makes the big bucks because they produce most of the music that people actually buy. It takes relatively few major musicians to saturate the market, so, even though everybody wants to be a rock star, very few niches exist for people to do so.
In investment banking, a relatively small number of highly skilled individuals maybe capable of the lion’s share of the really profitable deals.
tomWright,
They get away with mediocre decisions so long as they can keep the stock price up. Enron, Tyco, and other company histories attest to this.
I think we are looking at a more classical human failing. The great corporate failures almost always follow after great corporate successes. Like a greek tragedy, great success leads to hubris and an emotional need to maintain the adulation. People start taking increasingly risky and even illegal actions in a desperate attempt to recapitulate passed successes.
I think it is a mistake to think these jobs are ‘on offer.’ Attaining a job like that isn’t simply a matter of attaining competence at a particular skill, but having a particular skill in conjunction with certain other factors: an Ivy League degree for instance, and social status that makes one acceptable to the elites in that business. Hard work and talent aren’t going to be enough.
I got about 10th of the way through that article. I felt like Charlie Brown when adults are talking, and all he hears is gobbledigook.
Here’s my take. Corporate types are not paid the market-clearing rate for their work, they are paid `efficiency wages’, i.e. wages above and beyond the marginal cost of hiring the requisite talent, and that salaries are therefore insensitive to changes in supply.
The following story (maybe apocryphal) about Henry Ford illustrates the concept of efficieny wages.
There was a time when you could hire a skilled auto worker in Detroit for $2 per hour. Henry Ford went to his board and says, `We’re going to pay our guys $3 per hour’. Someone says, `Yeah, right, why not go the whole hog and give them $5′. Ford, says`OK, you’re on.’ and later described it as the best cost-saving measure he even made. How so?
Well, if $2 is the market clearing rate, you can hire workers for that rate, but equally, if someone doesn’t like their boss (or whatever) they can equally walk, and find equally well paid work elsewhere, with GM or whoever. At $5 per hour, they have something to lose, and therefore everything to gain by making sure that they keep the company happy, by working diligently.
In the same way, I suspect that the silly money (frankly) thrown at invetment bankers, etc. is a way of making sure that they think *very* carefully before doing something that might harm their employers interests. And this is quite important when (a) with a few poorly made trades these guys can bring down your company, and (b) monitoring their performance is difficult.
My $0.02 well and truly spent. I’ll stop now.
Good Post and interesting comments. I’m particularly taken with the rock star model. Its also clear that climbing the greasy pole is not enough. You have to stay there. And the old “success breeds success” cliche applies here too. When a firm gets a reputation for doing a good job and making money, it attracts more clients and it also attracts the best, or most ambitious, workforce who want to share in the goodies. But fail to perform and the penalties can be brutal, not just for the staff but for the whole business.
But Jonathan, why oh why did you have to bring up the crickey score analogy.
Today of all days.
I swear to you that I grew up wanting to be an accountant. A maverick accountant who carried a gun and drove an open-top car, but still an accountant. More young imaginations like mine – that’s what this country’s economy needs!
Two members of my immediate family have worked in banks similar to Goldman Sachs and another has just recently joined a bank like Goldman Sachs.
To get in you have to have graduated from Harvard or Cambridge or one of the other half dozen top universities. These banks do not select from anywhere else.
Once in you have to be prepared to be involved in very tough corporate politics, move to wherever in the world the company tells you to go (at short notice) and work your arse off. People see the champagne lifestyle and Porsches, what they do not see is the sacrifice most of these people make every single day right from when they are at school to get these positions.
One member of my family had to retire at 32 years old. Yes he made an absolute fortune but he was prematurely grey, paunchy and exhausted. His wife, another high flyer, is dead. She lived such a stressfull, goal oriented life that she did more living in 50 years than most people do in 150 years.
The one that has just started is 22 years old and has just started to realise that the rewards are high but the price is even higher.
I have known quite a few people who have gone this route to ‘success’. Ten years seems to be the limit before they have change their lifestyle completely to get some quality of life or end up killing themselves with work.
As a wholehearted capitalist I applaud the risk/reward choices that they made whilst choosing a different risk/reward route for myself. Very few people are really suited to the Goldman Sachs lifestyle.
The supply is not increasing because the pool from which the international corporate banks fish is really quite small as is the number of people who are really prepared to do what is demanded.
Sorry about the cricket reference. (Groan).
Johnathan Pearce,
Tell the truth, “Cricket” is just something y’all made up to pull the legs of gullible foreigners isn’t it. I mean come on, a supposed game with wooden balls, ashes, “sticky wickets” that takes 9 hours to play a match?
Did you really think people wouldn’t catch on?
Shannon, cricket is not just a sport, but a philosophy. (Anyway, let’s not get off-topic).
Johnathan
The payment to traders is no different to that of footballers post-Bosman. The reason both are paid so much despite rising supply (after all, every boy wants to tbe a professional footballer) is that both jobs are so measurable.
Imagine hiring a trader who you hope will make ayou $10mm per year. He ends up making $20mm. What do you pay him? An extra $50,000? Nope. Answer – a lot more. Because he can simply walk into another bank and demand a lot more money and you lose $10mm.
However the marxism article makes a valid point. If City bonuses continue to rise out of all proportion to the earnings of the general public, the current apathy to their earnings will change into a demand for ‘something to be done’. And we have just the govt for that!
I think the simplest explanation is the “winner take all.”
See The Winner-Take-All Society: Why the Few at the Top Get So Much More Than the Rest of Us.
No, it is not a socialist critique at all.
I doubt these banks pay their Ibankers more than they have to. They are not charities after all but businesses focused on making money. What they earn is probably proportional to the amount of business generated, and in this business when one is good at it one has the chance to bring in millions upon millions for the bank. Everyone talks about the millions they get in bonuses, but I’d like to know how much money they earned for the bank. It’s probably at least double what their bonus is. Similarly, how much money does a top athlete generate for the owners of the team? How much money does a top actor bring in? I think Ibankers fall into the same category. It’s just easy to say their pay is unfair because, at first glance, Ibanking seems like something anyone could do. Well, I’m not sure it is something anyone could do. Same with acting, same with musicians, same with athletes. In most fields of human achievement the top talent is rare.
Looks like the backlash has started.
I am unclear how a comment by the Right Irrelevant has any bearing on the matter.
It is all about trust, and no lesser in the Financial Markets. People tend to only trust people who either prove to them they are trustworthy over time or are demonstrably trusted by others that they already trust. Thus, they enter the profession via trusted Universtities, work for a trusted organisation proving themselves and then after a reputaiton is built, go wider. People do not declare trust for others who are not proven as it may weaken their own reputation, so people are conservative. People then only recommend the best. You can see that this concentrates ever more trust, repuation and thus value in a few select people. They get the opportunity to earn vast amounts FOR the banks and they do earn it because they have a repuation and it is often a self-fulfilling prophecy in terms of market movement. They do not have infinite lives, however. Keep screwing up and they will be in the wilderness.
To me it is not that they are earning vast amounts. It depends what they do with it. As a Londoner I am glad they earn vast amounts in London and not New York. They spend their money and if they spend it in London and are paid millions well, that is a few of the multimillions that the banks earn that gets ploughed into the local economy.
As far as I am concerned, London and in fact the UK should become the Hong Kong of Europe. Flat tax, then low tax. Unmatched rule of law then light regulation.
If the bishops and the other Sociofascists (“well meaning”, hypocritical or just plain spiteful) had their way London would not have sky-high bank salaries as there would be little else in London Banking than jobs as a teller or selling insurance against bogus credit card protection insurance. All the big money would be in FFT or NYC…and oh how the federalists would laugh.
If we want to see great pay for outstanding nurses, doctors and teachers, lets have a market where people can bid for them. Alas, that is not the idea the meddlers have – they want ALL to get the best salaries. Well, thats what we have now if you only realised it – the best price for all (regardless of talent) that can be afforded.
Part of the bonus is compensation for the fact that, by virtue of being able to manage YOUR money they are no longer able to manage their OWN.
Insider trading laws (yes they are enforced, just ask Jeff Skilling) and other regulations put some serious restrictons on what these people can and can’t buy, do, or sell. Most of them have some serious cash (i.e. last year’s bonus) and therefore have the option of taking that cash, walking out the door and spending the rest of their lives in Bermuda managing their money via E-Trade.
You have to make staying more attractive than leaving, and Bermuda is real nice.
I study the markets until 3 am every day….
I’m a fairly good trader… did 10x on the portfolio FEB.
I know how to price / trade any complex strucutured financial product. And deep program any major programming language.
I have a long term high performed CV… even winning internal banks competition… also have founded award winning fund…
But I never was called for an interview at GS… or other nice, good paying bank.