Why Do People Get Paid So Much?
Robert Samuelson, who sells himself as an authority on financial matters, asks a pretty dimwitted question:
Just why investment bankers and traders out-earn, say, doctors or computer engineers is a question I’ve never heard convincingly answered. Are they smarter? Unlikely. Do they contribute more to the economy? Questionable. True, Wall Street often performs a vital function. It channels savings into productive investments. It helps provide access to capital and credit. In 2006, U.S. companies raised nearly $4 trillion through new stocks and bonds. Many financial innovations, including mortgage-backed securities, have benefited individuals and companies.
While it’s true that computer engineers generally earn less than a select few investment bankers and traders, there are certainly those that earn more. Sergei Brin and Larry Page of Google are two computer engineers and they are earning more than just about any investment banker or hedge-fund manager. Why is that? It’s because Google just so happens to be insanely profitable. Wall Street types get high pay for similar reasons. Samuelson mentions a crucial statistic that seems to devastate his case that Wall Street get paid too much. A Wall Street bond trader with 15 years of experience gets paid, on average, $1.5 million, “with $240,000 in base pay, $975,000 in cash bonus and $310,000 in long-term bonus.” Notice that more than 80% of that total is in bonuses. In the dry years where bond traders and their firms aren’t raking in the cash, those bonuses shrivel up, sometimes to zero. I’m not telling you to feel sorry for the bond trader than makes a mere $285,000 a year, but they’re not exactly twiddling their thumbs.
There’s a good case to be made that making so much of the year-to-year compensation rewards short-term profit making over long term stability, but it’s hard to think of a system that would work out differently. There is a lot of money to be made in the financial industry, and if one firm started to pay people on a less performance based metric, then other firms could easily snatch up the most talented who want to be paid on year-to-year returns.
