What's too much?

The outrage against outsized bonuses in finance is understandably growing. Here’s Obama today:

One point I want to make is that all of us are going to have responsibilities to get this economy moving again.  And when I saw an article today indicating that Wall Street bankers had given themselves $20 billion worth of bonuses — the same amount of bonuses as they gave themselves in 2004 — at a time when most of these institutions were teetering on collapse and they are asking for taxpayers to help sustain them, and when taxpayers find themselves in the difficult position that if they don’t provide help that the entire system could come down on top of our heads — that is the height of irresponsibility.  It is shameful.

The only mystery to me is why has it taken so long?

I’ve never had a problem with entrepreneurs getting staggering rewards. The Google guys deserve their billions, as does Bill Gates, who is providing perhaps the best demonstration ever of how to spend your money once you have it. But why on earth did m&a rainmakers and whizzes on trading desks ever rate multi-million dollar bonuses? I think the only answer is the bonuses soared upward because they could. Banks made outsized profits and paid the bulk of them to their employees (or, at least, a subset of employees) rather than to shareholders.

The phenomenon led to terrible distortions in the market for talent. I may have missed something but when I graduated from my elite university in 1978, no one talked about investment banking. When I returned for my 25th reunion in 2003, the faculty members still around from my day told me that a healthy proportion of students wanted to become “i-bankers”. Given how these Ivy Leaguers screwed things up (as did the more rough-and-tumble crowd that was recruited by places like Bear Stearns), maybe it’s a good thing that this part of the purported intelligentsia didn’t go into neurosurgery or structural engineering.

A few years after I left the World Economic Forum, but at a point when some people there still occasionally sought my advice, I suggested a session on “What’s too much?” I was thinking of the great wealth CEOs were accumulating, rather than Goldman Sachs bankers. But the question applies even more forcibly today.

I have a private theory that both corporations and banks could probably invert their pay and reward scales. At some point, perhaps near the boardroom, rewards would decrease rather than increase. Companies would save money, and the leadership would be drawn from those who really want the responsibility — and, above all, the power — rather than those just in search of lucre.

3 thoughts on “What's too much?

  1. Lance Knobel

    It also looks like my friends at the World Economic Forum took a courageous stand on excessive compensation. Consider this session from the program of last week’s Davos:

    How to Answer the Compensation Question

    In the wake of massive bank bailouts and increasing job cuts worldwide, public and political attention has shifted to the broader issue of executive compensation.

    How can the issue of compensation be addressed in a proactive and prudent manner by industry?

    “Proactive and prudent”. I’m sure overpaid CEOs and financiers are quaking in their fur-lined boots.

  2. Doug

    Voltaire updated: “Dans ce pay-ci, il est bon de tuer de temps en temps un financier pour encourager les autres.”

    I think to be proactive on this issue they’re going to have to come up with a time machine.

    Too bad it’s probably against Senate procedure to break out the McEnroe during hearings with financial sector executives.


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