Wednesday, April 22, 2009

Wall Street Pay

Like Justin Fox, I was struck by this passage in Gabriel Sherman's New York magazine piece about Wall Street pay (but for an entirely different reason):

A few weeks ago, I had drinks with a friend who used to work at Lehman Brothers. She had come to Wall Street in the mid-eighties, when the junk-bond boom spawned a new class of globe-trotting financiers. Over two decades, she had done stints at all the major banks—Chase, Goldman, Lehman—and had a thriving career directing giant streams of capital around the world and extracting a substantial percentage for herself. To her mind, extreme compensation is a fair trade for the compromises of such a career. “People just don’t get it,” she says. “I’m attached to my BlackBerry. I was at my doctor the other day, and my doctor said to me, ‘You know, I like that when I leave the office, I leave.’ I get calls at two in the morning, when the market moves. That costs money. If they keep compensation capped, I don’t know how the deals get done. They’re taking Wall Street and throwing it in the East River.” Now, a lot of people in New York have BlackBerrys, and few of them expect to be paid $2 million to check their e-mail in the middle of the night. But embedded in her comment is the belief shared on Wall Street but which few have dared to articulate until now: Those who select careers in finance play an exceptional role in our society. They distribute capital to where it’s most effective, and by some Ayn Rand–ian logic, the virtue of efficient markets distributing capital to where it is most needed justifies extreme salaries—these are the wages of the meritocracy. They see themselves as the fighter pilots of capitalism.
Sherman's takeaway from the former Lehmanite's story—that Wall Streeters "see themselves as the fighter pilots of capitalism"—isn't at all what I took away from the story. To me, the former Lehmanite was simply expressing a well-worn sentiment in the financial sector: yes, compensation is extremely high, but it's not like working on Wall Street is all champagne and caviar. The hours are insane, the lifestyle is brutal, the pressure is never-ending, etc., etc. This, to most Wall Streeters, is justification enough for their exorbitant compensation. I don't buy this argument, but this is the way they think about it. Yves Smith—not one to sympathize with Wall Street, mind you—summed this mindset up well (in what was probably the last thing I agreed with her on):
You do not know how hard you can work, short of slavery, unless you have been an investment banking analyst or associate. It is not merely the hours, but the extreme time pressure. Priorities are revised every day, numerous times during the day, as markets move. You have numerous bosses, each with independent demands and deadlines, and none cares what the others want done when. You are not allowed to say no to unreasonable demands. The time pressure is so great that waiting for an elevator is typically agonizing. If you manage to get your bills paid and your laundry done, you are managing your personal life well. Exhaustion is normal. One buddy stepped into his shower fully clothed. And exhaustion and loss of personal boundaries is an ideal setting for brainwashing, which is why people who have spent much of their career in finance have such difficulty understanding why their firm and their world view might not be the center of the universe, and why they might not be deserving of their outsized pay.
Lawyers generally get paid a fraction of what investment bankers take home, so I've had this argument with friends on Wall Street too many times to count. And their argument always seems to come back to some form of: "Well, working on Wall Street is a miserable, miserable life, so you don't get to criticize my compensation." I don't think that justifies their exorbitant compensation (especially when a lot of what makes Wall Street jobs miserable is needless hazing), but that's generally their argument.

12 comments: said...

I think the compensation is the product of a fairly efficient market -- an auction for talent. The firms are competing hard for the very best talent -- that is really all investment banking is, their talented people -- hard assets are few.

The critical importance of being able to compete for talent w/o constraints is obvious in the maneuverings to escape the TARP constraints.

BTW, shareholders do not like to overpay. It reduces the dividend. So why are outsiders concerned about the pay of financials? Why are they in a lather about pay for media stars, movie stars, big name sports?

Richard said...

Ayn Rand was primarily an advocate of Reason. Whilst executives who do a great job deserve rich compensation, she is NOT in support of those who get rich compensation without rationally earning it. She never ever advocates the acquisition of the unearned as proper. Indeed, she shows that unfettered capitalism and a rational egoistic ethics actually prevents such unreason. Were as, it is the subjectivism of statism, and a culture of unreason that enables the undeserving to obtain unearned wealth and power.

Anonymous said...

The issue here is that all of these "fighter pilots" turned out to have pathetic performance.

What these people don't understand is despite all their running around, that much of what they did over the last 5-10 was ultimately unprofitable.

Hard is not a justification for a big pay check. Success is.

Anonymous said...

The most efficient use of taxpayer dollars is to compensate these overworked Wall St "fighter pilots". Public health, education, food safety, science, arts funding etc are inefficient allocations of capital which afford unnecessary protections to the less productive members of society. Spending on these inefficiencies should be reported in Geithner units (1 Geithner = total $ amount of AIG bailout to date).

Anonymous said...

If an individual has the bargaining power to raise their salary, has contributed to the company itself in a measurable way and has the potential to provide greater value to the company. Then what is wrong with the provided compensation?

You can't make a comparison between lawyers and financiers in Wall Street. Their work is different, their contribution is different to society and the companies involved are different. This is the outcome of envy. I'm not a financier. I'm on minimum wage. But I think individuals should have the right to say "I'm worth more".

Also, if a business like Goldman Sachs is able and willing to provide such salaries to their employee's, they have every right to do so. We should let the market operate and correct itself. Society have brought up questions of "reasonable pay". If it isn't "reasonable" then we may see changes to future pay rates and compensation.

But who would really be willing to stand up and say "I should be paid less", because there are many economists out there that think my wage shouldn't have a price-floor, that the lower end of society should be paid less. Who here would willingly reduce their salary if society said "It's too much"?

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