Wall Street pay ceiling plays to the gallery
President Obama’s $500,000 cap on top bankers’ pay may play well in Des Moines but it is as bad for America as it is bad for Wall Street. If you want banks run properly you have to pay properly.
Past bonuses and pay have been gross of course; bankers and brokers claimed they were taking their share of huge profits but we now know there were no huge profits. Britain imitated New York in its overpayment. But simply because banks are now admitting to past errors and are dependent on government capital is no reason for expecting bankers to work for peanuts.
Cutting pay may encourage the bad bankers to leave the industry but it will not encourage good financiers to sort out the mess.
Obama is playing to the gallery in imposing a remuneration cap. To the voter on $50,000, a half-million dollar cap seems more than enough. But that voter probably thinks his job is really worth $60,000 and aspires to be promoted to a position that pays $75k.
The salesman on $75,000 no doubt hopes to become territory manager on $100,000 and possibly deputy regional manager at $150k. Surely he doesn’t expect the full regional manager to be on less than $200,000? And why would anyone want the sales director’s job if it doesn’t pay $275,000? On that basis the main board marketing director would expect $350,000 and the chief executive $500,000.
And if the voters on $50k think about it and are honest they want such a hierarchy of pay and jobs to exist, even if they are at the bottom.
It is ridiculous to expect the curve to be steep at your own level but flatten at the top as though you need incentivising but better paid people do not. Obama would not think of himself as a communist of socialist but his capping policy is a move towards expecting everyone to work for a flat wage.
In practice, Wall Street will find a way round his constraint. Obama himself suggests applying it only to the top 25 executives in an organisation – giving the perverse possibility that deputies will be paid as much as or more than their bosses. He has given the let-out of making payments in stock rather than cash – a wise measure though one that could provide disproportionate rewards because stock prices are currently so low.
And wise bankers will measure the public mood that the president is tapping, even if they still have cash to pay in bonuses. Goldman Sachs is typical of US bankers in cutting its pay bill by 44 per cent.
If Obama was to find a way to recoup past bonuses he might both be applauded by voters and provide a fair solution. If there was talk of banning or even prosecuting the financiers guilty of the greatest excesses then justice would be done too. But a pay ceiling on the bankers who can sort out this mess is no answer.
