Wall Street Compensation Reform: A Necessary Distinction

In the financial regulatory reform arena one of the most widely discussed and highly sensitive issues relates to compensation structures on Wall Street. From the numerous opinion-based articles written on this topic it seems that there is a growing sense of populism in America against the so called ‘unjust’ bonuses being paid out to bankers working on Wall Street. While I think it’s important that we, as a collective society, voice our populist opinions in order to make sensible reforms in regards to outlandish compensation schemes on Wall Street, we also need to be very careful about how we toss around the term ‘unjust’. And right now the general public is failing to make a very important distinction on the issue of Wall Street compensation: that is, the justness of bonuses paid out to junior-level analysts vs. senior-level managers.

Most people blindly lump junior-level and senior-level bonuses on Wall Street together, but the truth is that the two pay structures are vastly different in terms of both size and fairness. While it’s true that bonuses paid out to executives on Wall Street helped fuel the recent financial crisis by shifting industry performance incentives—from a long-term focus towards a short-term focus—it’s also true that the analysts employed at the bottom of these executives worked hand over fist for their institutions and that the sub-prime crisis and subsequent financial implosion was, in large part, out of their hands. Blaming junior-level analysts for the recent financial crisis, and in turn attacking their modest bonuses (relative to executive bonuses), is not only nonsensical, but it’s also antithetical to our capitalist system.

If a college graduate wishes to dedicate 80+ hour workweeks as an analyst at a financial institution, then he or she should be appropriately compensated for that effort. Right now on a per hour basis the compensation system on Wall Street at the junior-level does just that, with investment banking analysts making an average yearly salary (including bonuses) of just over $140,000 according to a survey compiled by BankersBall from 2007 to 2009. That’s how capitalism works: if you are willing to work hard you will be rewarded with higher income levels.

Now the real problem at hand in terms of compensation structures on Wall Street is how progressive the system becomes as one gets promoted into higher-level positions. Making a little over six figures as an analyst may be just; making tens of millions as an executive is clearly not. And it becomes even harder to justify these progressive pay-for-performance schemes in the wake of a near wholesale collapse of our entire financial system.

So while the general public has every right to be outraged regarding pay on Wall Street, that outrage should be specific and not general; it should target upper-level executives only, not junior-level analysts. In the private sector entry-level employees represent the backbone of productivity, which keeps firms functional, and during good times, profitable. But when we talk about deterring incentives at the entry-level of business that is precisely when we begin to move from a market-based economy towards one that is authoritarian in nature.

Thanks to Flickr for the photo.