Wednesday, December 03, 2008

Cutting banker pay

Maybe its my bolshy tendencies, or more likely my ethnic background, but I have an instnct that massive payand wealth disparities are a sign of a sick society. While I have respect for entrepreneurs who have built lasting businesses and gotten rich doing so, the paydays in the finance sector over the last three decades have been, to my mind, sickening. And with the current financial meltdown, even some longtime and sympathetic industry observers are beginning to look at it the same way, and finding the testicular fortitude to dismiss the usual hogwash about how lower pay would lower performance:
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.

The financial system went for decades, quite happily, without monster paydays: why can't we go back to those days? No one thinks we need to pay the Treasury secretary lots of money to make sure he's "working hard"; why are bank CEOs any different? And insofar as lower bank salaries would drive America's best and brightest into other sectors of the economy, that would surely be a good thing.

A massive, across-the-board pay cut in the banking system -- to levels which would still be incredibly generous by normal-America standards -- might result in a mass exodus of employees and a radical downsizing of the banking sector. But that's going to happen anyway, this would just achieve it without layoffs. And the outcome can't really be worse than what we've seen to date.
I don't know how you legislate this except through taxation, but as a matter of political ethics, this is just about common sense and democratic decency. The argument for much greater pay equality is fundamentally about political justice. And just as Salmon dismisses as nonsense the argument that lower pay would lower performance, I dismiss as nonsense the claim that higher taxes compromise the liberty of the rich.


Edward said...

Strengthen shareholder rights to the point that pressure on compensation is translated into lower pay by groups like Calpers et al. There are shareholder advocates but they do not have the strength to push reform through the Byzantine system where only people with huge pay packages serve on public boards. This has the benefit of making management more accountable, being a "private sector fix" and changing the underlying problem rather than the system.

Mick said...

String them up. Just string a few of them up and see what the effect is on compensation committees.
Sorry I am rather angry having just listened to a program from BBC's File on 4 detailing the evidence in lawsuits alleging fraud by bankers. Transcript here:

Brad said...
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Brad said...

Yes to Edward’s “private sector fix”, but in a slightly different way, don’t become a shareholder in the first place. The bottom line is actually the bottom line, we need better educated, as well as more active, investors and consumers.

Yes to Mick, but also in a slightly different ways. I want jail time for malfeasance, not country club jail time, real jail time. The threat of paying a $200 million dollar fine on $750 million in ill-begotten gains isn’t much of a threat.

And to Nils, income inequality is a large problem, but I think the answer is lies more with preparing workers for the “productivity economy” than any wealth redistribution scheme. My mom once owned a small machining shop, and it used to take four workers with over five years experience each to run the lathes.

That company went under, but she is still involved in the industry, and now one operator with two months of training can run a computer console which controls all four lathes. More output, a lower price for the product to consumers, productivity in action. But then again four experienced workers are out of a job. As an economist explained to me, the question is: “Why aren’t the owners using their cost savings to buy more machines?”

In other words yes we are doing more with less, but why aren’t we doing even more?