Banker Pay: Salmon vs Barnett

I just had this IM exchange with Megan Barnett:

Felix Salmon:

Hi Megan, I see you’re attacking the cap on bankers’ pay, while I think it’s a good idea.

Megan Barnett:

Yes, it’s true. We finally disagree on something.

Felix Salmon:

I suspect that at heart we disagree on the degree to which "smart executives" who can command multi-million-dollar pay packages are really the solution to the current problem

Would you at least agree though that they’re clearly a large part of the cause of the current problem?

My feeling is that there’s an unspoken assumption in a lot of the rhetoric surrounding this issue that there’s some kind of efficient market in bankers: that if someone is being paid millions of dollars, that must be because he’s particularly able. Hasn’t this crisis pretty much destroyed that hypothesis?

Megan Barnett:

I do agree that there are plenty of top execs with multi-million dollar packages that were a large part of the cause, yes. But I don’t think that every bank executive who made more than a half-million was to blame. And I don’t think that capping pay will necessarily attract better leaders.

Felix Salmon:

But what makes you think it will attract worse leaders?

At the very least it will attract less greedy leaders, and that’s a good thing, no?

Megan Barnett:

Greed is all relative. These are people who are trained to make money for their businesses and they’ve spent their careers doing so. True, that got out of hand here, as it has in the past and will again in the future. To me, it’s not about whether or not less greedy=better. It’s about the fact that this is the wrong solution to the problem. It’s off point, misguided, and little more than a PR maneuver for the populist masses. It’s not going to fix what’s broken now.

Felix Salmon:

The system of annual bonuses was the best way yet devised of incentivizing top managers to push as much risk as possible into the tails. The way to get rich in banking isn’t simply "to make money for your business", it’s to come up with a strategy which outperforms everybody else, usually because the risks are hidden and there’s a chance of it blowing up spectacularly. In fact, there’s a case to be made that Bob Rubin’s entire private-sector career followed exactly that path.

Fixing the compensation structure on Wall Street is an absolutely necessary part of the solution.

And PR maneuvers do actually serve a function, insofar as they send a message that the government expects to see serious and meaningful change.

Oh, one other point: 50% of Wall Street revenues go to compensation. This isn’t off-point, this is very much the point.

Megan Barnett:

But this plan doesn’t fix the structure at all. There is no reason why Bank of America can’t still reward a certain trading desk with six-figure bonuses. This applies to the top execs. I think this banking crisis should change the bonus structure overall going forward, but I don’t think it’s something the government should be forcing. I’m not arguing that Wall St compensation isn’t too high, I think it is. I just don’t think that Obama limiting the pay to top execs is the answer.

Felix Salmon:

Right, Obama isn’t trying to solve all the problems of the banking system at a stroke. But he is sending an important message to bank CEOs about the new world which they’re living in. And he is protecting taxpayer dollars from being spent on multi-million-dollar executive compensation packages, which is just about the worst form of fiscal spending imaginable.

Megan Barnett:

And do you think this will deter banks from seeking help if they need it?

Felix Salmon:

The FDIC is already crawling all over every bank in the country. If the FDIC determines that a bank is insolvent, then it’s going to have to accept government intervention whether it wants it or not. Participation is not voluntary.

Megan Barnett:

So, let them run themselves into the ground first. I can’t imagine a Wall Street where the motivation isn’t the money you make. I don’t think that having academics running the banking system will yield any better results for Americans.

Felix Salmon:

The really good CEOs are going to be OK with this. They know that if they do a good job, they will have risen to a great challenge and made the world a better place: they’re not driven purely by avarice. Or rather, insofar as they have been driven purely by avarice, that’s been a large part of the problem. So let’s see what happens when we get lower-paid CEOs. There’s a good chance that they’ll be better than their predecessors, and there’s no real evidence that they’ll be worse. (Can they be worse?) Most likely, of course, management won’t change at all, and we’ll have the same multimillionaires running the banks, just on a lower salary.

Megan Barnett:

We shall see. Thanks for the chat, Felix. I’m off to lunch.

Felix Salmon:

Pork?

Megan Barnett:

Ha! No, not today.

Felix Salmon:

Maybe tomorrow.