How Banker Pay Is Out of Whack
We all know that we get paid a lot relative to the average guy on Main Street. We like to think it's because we're something special: that we've attended the right schools, that we have the right combination of hard and soft skills, that we're...well...somehow better than everyone else. But this was not always the case.
In the 1950's, bankers made the same amount of money as everyone else. Now, you might say "Well, Eddie, that was in the '50s. We're so much more sophisticated and our work is so much harder today." And that may be true. But is it 500 times harder? Because that's roughly the amount that bank CEO pay has pulled away from the average worker since just the 1980's.
The problem lies in how bankers are compensated. The shareholders-be-damned approach that has evolved since Lynch went public in 1971 simply rewards the wrong behavior. The current compensation model unduly rewards those who take excessive risk and empire build (case in point: 's Ina Drew - the Whale's boss - earned $1.3 million a month for the last two years).
Obviously this model is retarded and leads to all sorts of moral hazard, most notably the "company put". In other words, a trader can take all the risk he wants to juice his pay knowing full well that if he blows himself up the firm is going to eat the loss. It's the classic heads-I-win-tails-you-lose scenario.
Another bogus metric bank CEOs (and, by extension, lower rung bank employees) are paid on is the size of the bank.is notorious for trying to juice year-over-year growth, when in fact a bloated behemoth of a bank is one of the worst performing business models. I'd direct you to the hilarious graphic in the article showing how the Bank of the Ozarks absolutely kicked 's ass from 2005-2008.
Now before you get all pissed off and think that I'm saying you're overpaid, realize that I'm saying that the worst of it is at the upper levels. But can you explain to me why bankers should make several multiples of the average guy on the street? Especially right out of undergrad, when you don't know anything?
I'm not immune to the criticism. If you guys knew what I did to make this kind of money in the late '90s, you'd probably puke (yes, that's one week's pay):
I got rewarded for taking crazy risks that didn't always work out all that well for the client.
I had a conversation with some friends the other night and the topic of our worst job ever came up. I didn't give it much thought, but I said the worst job I ever had was building a parking lot once when I was 20. Coincidentally, that job took about a week as well, for which I was paid $350. $350 to work in the hot sun pouring asphalt, lugging cement blocks around, and pounding rebar through them with a sledgehammer. $350.
As a commodities trader, I made 120 times that to sit on my ass filling out trade tickets and yelling, "Runner!". Kinda makes me shake my head these days (but not enough to give the money back).
What do you guys think? Would indexing compensation to Return on Assets (as the majority of regional banks already do) instead of Return on Equity bring things more in line? Guys like TheKing and I are always calling for a return to Glass-Steagall, and that would certainly take care of the TBTF issue. Would you still work in finance if the compensation were more in line with what your peers make?