As Economics of Contempt says, this is what builds their outsized sense of entitlement to their compensation:
To me, the former Lehmanite was simply expressing a well-worn sentiment in the financial sector: yes, compensation is extremely high, but it's not like working on Wall Street is all champagne and caviar. The hours are insane, the lifestyle is brutal, the pressure is never-ending, etc., etc.
This, to most Wall Streeters, is justification enough for their exorbitant compensation. I don't buy this argument, but this is the way they think about it. Yves Smith--not one to sympathize with Wall Street, mind you--summed this mindset up well (in what was probably the last thing I agreed with her on):
You do not know how hard you can work, short of slavery, unless you have been an investment banking analyst or associate. It is not merely the hours, but the extreme time pressure. Priorities are revised every day, numerous times during the day, as markets move. You have numerous bosses, each with independent demands and deadlines, and none cares what the others want done when. You are not allowed to say no to unreasonable demands. The time pressure is so great that waiting for an elevator is typically agonizing. If you manage to get your bills paid and your laundry done, you are managing your personal life well. Exhaustion is normal. One buddy stepped into his shower fully clothed.
And exhaustion and loss of personal boundaries is an ideal setting for brainwashing, which is why people who have spent much of their career in finance have such difficulty understanding why their firm and their world view might not be the center of the universe, and why they might not be deserving of their outsized pay.
The difference between me and them is that I don't think they deserve their pay, either. Now it may be that I, in my position as taxpayer, have to continue to pay these guys their huge salaries, because the unintended consequences of trying to regulate their pay will make it harder to get the banking system back on its feet. (It also may not be so--it's an empirical question to which I don't have any good answer). But the bankers genuinely seem to believe that I have a moral obligation to do so, that they are entitled to two million a year, or whatever it is they're pulling down, because they work so hard.
Guess what, honey? You're not entitled. You can do everything right, and the universe doesn't owe you anything. Neither do your fellow taxpayers. If there is any way to save the banking system without paying you $2 million a year, I will do it, not because I hate you and want to rob you, but because I don't want to pay more than I have to. You may have come across this concept in business school. At Chicago, we called it "a market".
The real problem with investment bankers goes deeper, and is the problem of the entire upper middle class: we have come to believe that complying with the rules produces excellent results as by some natural law. In school, if you do your work, teacher gives you an A. It comes to seem like a sort of a natural law: if you have a good education and work hard, the universe is supposed to reward you. After school, the upper middle class gravitates towards careers with very well defined advancement hierarchies: medicine, law, finance, consulting, where this subtle belief is constantly reinforced.
True, a lot of people fall by the wayside in the up-or-out structures of most of the top firms. But that was always true--the whole idea that you deserve to be rewarded for your hard work always involved ignoring the entirely undeserved natural endowment of intelligence and social capital that most upper-middle-class kids are given by their parents. The people who stay in the system and make it to the upper levels do not see it as mostly the product of luck; they view it as the just reward for all their hard work and sacrifices.
I include myself in this group. When I was laid off for a long time in 2002, I felt as betrayed by the universe as if the law of gravity had suddenly ceased to operate. I had worked hard, gone to an excellent business school, and I was supposed to have a job, just as an apple thrown into the air falls back to earth. I was angry, but also deeply shaken, by the notion that I could work hard, do everything right, and still end up unemployed.
We're watching the entire investment banking industry go through what I endured seven years ago. They aren't going to be paid so well in the future, even though they made the colossal mistake of giving up the best years of their lives to the finance industry. It feels--and it is--massively, nearly unfathomably unfair. On the other hand, that's a pretty good description of the universe: massive. nearly unfathomable. unfair.
Just ask any manager at Chrysler with two swell kids and a nice house in a Detroit suburb.
Anyone who has a halfway decent job is incredibly lucky--and yes, journalists and academics, complaining that it isn't fair you don't get paid much, that includes you. If your IQ had been forty points lower, or Mom had been on drugs, or you'd been born in Africa, you'd be spending your days doing hard, disgusting manual labor. The difference in utility between your salary and an investment banker's is trivial compared to the difference in utility between your salary and a Bangladeshi farmer's.
So for all the bankers annoy me, their pay--and its difference from mine--doesn't outrage me. The difference between their pay and that of a physical therapy assistant or an auto line worker doesn't outrage me. No one deserves their pay, so I can hardly be angry at the folks on Wall Street for taking what they could get. And so I wonder why so much of the commentary on Wall Street--not on the pay caps, but just on Wall Street in general--focuses on how much they were paid. Would it have been better if they had only been paid a third, or a tenth, or a twentieth as much? Would that make the recession significantly more enjoyable for the rest of us?
They made colossal mistakes, to be sure. But if you thought that high compensation was supposed to guarantee no errors, I have the same response to you that I have to the bankers: the universe does not owe you anything in the way of guarantees. Besides, their mistakes were no more colossal than those of the homeowners to whom they loaned the money. I don't see why I'm supposed to be angry at either group, or the regulators, or the Chrysler workers. Trying to make as much money as an employer will legally give you, and making mistakes, are neither legal nor moral offenses. Why isn't it enough to say, no, thank you, I'd rather not pay you that much money? Why is it also necessary to hate them?
Envy is considered a mortal sin for a reason. As a shareholder, I take the position that a lot of management at companies are over-paid, but I am outvoted by the rest of the shareholders. Fine. If I don't like it, I can simply sell my shares and wash my hands of the matter. Outrage is an entirely inappropriate emotion.
As a taxpayer, I am not allowed to sell my shares. Outrage may be appropriate in the case where the government is paying the bills, but then I think the outrage needs to be spread around a bit since I think Congress, its staff, the administration and its staff are overpaid, too.
This is why the bailouts should never have occurred- the envious outrage is destructive to society, and it is leading to actions that undermine the integrity of the law.
Congress is overpaid? CEO's make hundreds of times the salaries of congressmen and the president, and there are MORE of them too!
Staffers and gov admins do a HECK of a lot of work, and they deserve more than the meager salary they get.
The congresspersons who make oodles of money have their own lives and sources of income OUTSIDE of the US government, not inside.
Being outraged for footing us the bill is a reasonable thing. at their SALARIES? Surely not. Anyone doing their jobs in the private sector would be earning 2-10-100 times more.
Isaac,
Then why should outrage be directed at those bailed-out bankers? Why is one appropriate and the other not?
exactly. annoyed at them is one thig. outraged at their salaries iss another.
Why do sports/rock/TV/movie/etc. stars earn multimillion contracts? Because the money and business they bring in both directly and indirectly far exceeds their costs. These people feel they are worth their money and the fact that they are being PAID that money asserts that the market agrees with them. That you don't agree with the market doesn't justify outrage.
The issue is that they are being "bailed out" by people who DON'T value their services, rather than by those who do. Essentially, we are being forced to pay their salaries, as opposed to someone who actively seeks their services. Since when does the government have the right and ability to force you to hire someone (affirmative action aside)?
Of course Congress is overpaid. They produce nothing! In fact they produce worse than nothing, their every action consumes real resources that could have found higher valued uses.
perhaps you'd prefer a dictatorship? Communism?
Given the track record of congress (both parties) over the past 8 or so years, they would be overpaid at $1/year. That said, with them it is not the salaries, its is the perks that gall me. Pelosi extorts personal and perpetual private jet service out of the Air Force. Murtha uses government money to build himself a private airport - I mean, most CEOs have corporate jets they use, but they at least land at Teteboro or Van Nuys - few have the Hubris to have their "employer" build them a personal airport in the middle of nowhere. And how about all those congresscritters who just "happen" to have a spouse who is a lobbyist?
You'll find much less frustration as a shareholder during proxy season if you stick to small cap stocks. First, you typically don't have to worry about excessive compensation; second, a higher percentage of the CEOs are also the founders and own significant stakes in the company; and third, there are usually no sinecures on the board for window-dressers.
"I think Congress, its staff, the administration and its staff are overpaid, too."
I have to part company with you here. They are extremely underpaid relative to their responsibilities, which is why the temptations of profiting off of their offices are so great. I'd rather see politicians paid big, deferred bonuses (over, say, the next ten years) contingent on them achieving certain goals we can all agree on.
They are extremely underpaid relative to their responsibilities...
If they did their jobs properly, and stayed within the bounds the constitution set for the federal government, they wouldn't have so much responsibility. You're putting the cart before the horse.
I'm going to have to agree with DaveinHackensack. $170,000 a year for people who control billions of dollars of appropriations? You have to look back at what Plato said: if you don't compensate those in power, you end up attracting only those who accumulate power for power's sake and to enrich themselves.
Senators are paid far less than the board members major corporations and their responsibilities are far more.
Well put. You have a knack for clear expression and careful consideration. Though I have often heard of the stress that bankers and traders go through, their actual attitude had me stymied thusfar, despite knowing a number of them. I have, essentially, removed myself from the stockmarket and finance world as of late, as money (shocker!) doesn't inherently possess utility or value for mean. It is a means of acquiring things I value.
In a little while, I'll be poking my head back into the Wall Street Theater to see whether I wish to engage myself the drama du jour. For now, I'm (relatively) young and employed, and I don't need that kind of stress.
You can do everything right, and the universe doesn't owe you anything.
Well put. Interestingly, after arriving at this same conclusion a few years ago, I ceased being a libertarian and began having a lot more sympathy for the welfare state.
Because you assume that in the above case people ought to owe you something?
Life is unfair, period.
Well, shouldn't we try to make it a bit more fair then? Isn't there a basic human desire for fairness?
My point was that winners and losers aren't determined by moral failings, yet our cultural mythos tells us otherwise. When viewed from that perspective, social safety nets don't seem so "unfair" to those bearing their burden.
Well, shouldn't we try to make it a bit more fair then? Isn't there a basic human desire for fairness?
The answers to these 2 questions are not obviously positive. Especially when fairness ends up being enforced at gunpoint -- and before you dismiss it as hyperbole, think it through.
Yet another thing is that insidious "we" you've used above. There's nothing obvious in that "we", and how it gets composed from "I"s.
My point was that winners and losers aren't determined by moral failings, yet our cultural mythos tells us otherwise.
I don't think this is true. In my experience for the most part the people on top are there because they were willing to do what they had to do to get there.
tsotha writes: "I don't think this is true. In my experience for the most part the people on top are there because they were willing to do what they had to do to get there."
Clearly there's a strong correlation, I'm not denying that.
Perhaps I should have written that winners and losers are not exclusively determined by moral failings. Even with that obvious caveat, I wouldn't be surprised to hear a considerable number of otherwise reasonable people disagree.
tsotha
Well, one of Megan's points is that a lot of people also do what's necessary to "get there", but they just don't.
Your reasoning seems to suffer from survivorship bias.
Or not. The average entrepreneur fails twice before succeeding. The people who went to top ivy league schools and worked crazy IB hours will succeed. This is just a detour.
Right. Those who eventually succeed fail twice in average before succeeding. You see how you keep doing the survivorship bias mistake?
What you may be missing here is the failures aren't vaporized by a jealous god. I see them too, toiling away in middle management, running out the clock. And just like the successes share a set of characteristics, so do the failures. You see how you don't understand how survivorship bias doesn't apply here?
So little text, so much crap. It isn't like you, tsotha.
Why would the the vaporizing god be jealous of the failed employees? Beware of sloppy imagery, lest you're vaporized by the God of Good Writing Style.
Actually, some of the employees do get vaporized, in the sense that they disappear from view. Some people just fail to get promoted. But other people quit, or get fired, or change jobs when they fail to get a promotion. It's not that easy to get rid of survivorship bias.
But even if they fail and you see them "toiling away at middle management", remember that you said "the average entrepreneur fails twice before succeeding". So part of what you see may be the yet-to-be successful people. Who knows?
Unless you go by a more conventional definition of entrepeneur as someone who tries to start some new business outside. But then the survivorship bias returns in full force, because we are much more likely to hear about the successes.
Redundant reasoning. If the "share of characteristics" of the successful are indeed responsible for success, by definition the failures won't have them. Conversely, if the characteristics shared by failures are responsible for their failure, then the successful people won't have them.
But whole this is kind of beside the point. One reason it's not a good idea to make the company where you work the data for the Great Model of How The World Works is that requirements of success undoubtedly vary between jobs.
But, coming back to your initial proposition - "people on top are there because they were willing to do what they had to do to get there" - this amounts to a tautology. They are on the top, so, once again by definition, they did what it takes to get there.
Now, as to Stan B's first point
Which is exactly right. Our culture makes us believe that failure or success are the sole product of qualities like hard work or talent. As a consequence, a lot of people fail to recognize the obvious assertion that particular circumstances we have not control of, or didn't anticipate, are partly responsible for our degree of success. We are sure, that success or failure are always just and deserved, we just have to find out why it is so. It's a conclusion looking for the right premises.
Why would the the vaporizing god be jealous of the failed employees? Beware of sloppy imagery, lest you're vaporized by the God of Good Writing Style.
Heh heh. Good point. From now on the vaporizing will be done by inscrutable aliens. Good thing I don't try to pay the bills with my prose.
Redundant reasoning. If the "share of characteristics" of the successful are indeed responsible for success, by definition the failures won't have them.
I'm not sure what you're trying to say, here, unless it's that some people aren't born with the skills to succeed and are unwilling to acquire them. If so, I agree.
Our culture makes us believe that failure or success are the sole product of qualities like hard work or talent. As a consequence, a lot of people fail to recognize the obvious assertion that particular circumstances we have not control of, or didn't anticipate, are partly responsible for our degree of success. We are sure, that success or failure are always just and deserved, we just have to find out why it is so. It's a conclusion looking for the right premises.
This is a bit of a straw man. I don't know anyone who believes luck plays no part at all. Of course some people are luckier than others. It takes a whole heck of a lot of luck to end up like Gates or Buffet no matter how smart you are or how hard you work, but in my poker days I ran into a lot of millionaires who were no luckier than anyone else. They did share some personality traits, especially the ability bounce back, emotionally, from failure. And the inability to play poker well, but that's true of poor people as well :)
I also know a group of "unlucky" people who opened a retail business without figuring out what they needed to charge their customers. Who waited until tax time to learn what kind of records they needed to keep. When that business failed they gave up and went back to working for a big technology company instead of trying again.
If I had to put a number on it I'd say 90% of people made the decisions that put them in their current tax bracket, though it may take a few years to settle out. I think it's a little disingenuous to start labeling success-via-hard-work a "myth". It may be comforting for people who feel like failures to attribute it all to circumstances beyond their control, but that idea is much more of a myth than the other.
90-130 hour weeks? Come on. There are only 168 hours in a week and you're saying some of these kids are working 130 of them? That's 18.5 hours a day, or 6a-1230a 7 days/week.
Yup. That's what an investment banking schedule in a busy group looks like. 90-100 hours is the baseline.
90-100 hours/week is vastly different from 130 hours/week. Working 130 means you have 38 hours left to pay bills, do laundry, shop, clean yourself, and sleep. It isn't possible to be healthy and work like this.
I'm sorry; I don't buy that.
Somebody was sitting in those courtside Knicks seats, $500 Yankee box seats, partying in the many pricy night spots in Manhattan, going to Broadway shows, and doing all the other things that made NYC such a hopping place over the past dozen years. And I don't think it was the cab drivers and the doormen and the toll takers and the nannys and the custodians and the waiters and waitresses.
If investment banking were really a consistent 100 hour a week job, then investment bankers would have no time to spend any of their money (which should have cushioned them well for this downturn) or supoport the other businesses that have thrived in NYC and are suffering now.
I'm sure there are some who work those hours, and I'm sure there are crunch times when that is expected from everyone, but I don't buy that this is the baseline.
Feel free not to buy it. It's nonetheless true. Work weeks in investment banking started at 90 hours a week for slackers, and marched rapidly upwards. The analysts did spend a lot of money when they went out. But they sure didn't go out much compared to any other profession in NYC.
Thomas Blair: yes, there is a difference, and you read me wrong--I wasn't saying that they all regularly worked 130 hours. But 110? Not uncommon. 120? Definitely part of every banker's life. 130 occasionally. Bankers work harder than any other group of people in America. That doesn't mean their output was valuable, or that they deserved to make zillions. But in terms of sheer hours put in, the lower-level bankers in the MD tournament log more hours than any other profession.
To Megan (as comments don't nest any further):
I didn't read you wrong. You wrote that you work 60-80 hours/week and ibankers work 30-50 hours/week more than that. I didn't say that they all worked 130, either.
I spent five years as a Submarine Junior Officer in the US Pacific Fleet back at the end of the cold war ('87 to '92) and I can personally confirm that 130+ hour work weeks are survivable. While deployed you are lucky to get 25 hours sleep a week and then when in port you work twelve hour days fixing the boat and every third day you get to stand watch all night. All of that for the grand total of about $17k a year to start and about $30k by the end. If I had stayed Navy that would have been my life and lots of seriously dedicated men do (subs are the last bastion of the all male Navy).
Megan is definitely not exaggerating the working hours.
I had a good friend who went to work for Goldman. He was not a particularly gung-ho guy for it (just left after a few years, as was his plan) and his hours were regularly 7am - 10 or 11 at night 5 days a week and at least 12 - 16 hours on the weekend.
And when I would taunt him for working those hours he would explain that he was pretty much the slacker of his group. When he'd get to the office at 7, he wasn't the first one, he was one of the last. When he'd leave at 11, conversely, he wasn't the last to leave and turning out the lights, he was among the first.
And that was just regular, week-in/week-out stuff. When crunch time hit, he'd be there for hours that I literally could not comprehend working: 6 am - 4 am the next day, go home and shower, back to work by 6:30 to do it again. I couldn't imagine being even minimally functional in that situation but there it was.
Of course, that's why I've consciously tried to choose a career with a saner work/life balance. But of my friends with careers with no work-life balance at all (doctors going through residency, a smattering of corporate lawyers, etc.) by far -- by far -- the most consistently lopsided (they all have their bad times and are also generally abysmal to my mind) are the guys in finance.
Though I would also agree with the sentiment that this does not mean it was time well spent or created anything of value for the world at large. In fact, I often argue to them that they are not at all creating value. The more honest among them admit it.
If investment banking were really a consistent 100 hour a week job, then investment bankers would have no time to spend any of their money (which should have cushioned them well for this downturn) or supoport the other businesses that have thrived in NYC and are suffering now.
Wives.
I once worked a temp gig in a non-Investment Banking department in Goldman Sachs. I saw some variation in the hours worked. There was one older, divorced woman, a VP, who worked absolutely insane hours. There were a couple of associates who seemed pretty sharp and efficient and worked what appeared to be 50-60 hours. Both of these two were married or engaged. And then there was one young woman associate who worked a lot of hours, but she didn't seem to get a lot done during normal business hours. She'd sort of drag ass and than around 6pm ask who wanted to order in some Thai food. There was also another associate who left the company (for Citigroup!) because she said they tended to work more reasonable hours.
To Thomas: you're adding backwards. I was going from 110 back to 60-80: 60+50=110 or 80+30=110. You're adding the max to the max, which I agree is not normal. But fifteen hour days five days a week, plus two 8-12 shifts on the weekends? Sadly common.
110-130 hrs/wk was typical for surgical interns prior to "duty hours" regulation. Internal med residents also worked up to 110 hrs/wk. Not forever, not every month, but it was done commonly.
Prior to duty hours, I easily worked 90-100 hrs/week on hard rotations during intern year of pediatrics. I never topped 100, though. I couldn't (and wouldn't) have done a job that required that every month, or for more than a year.
But I do not doubt many junior associates could work those hrs for a short period of time.
I think most of the "outrage" over certain banking execs getting high pay ("high" being the definition that varies based on who is complaining) has more to do with that pay coming from bailout money made up of everyone's tax dollars. Consider anyone--from a factory worker to an executive--in an industry that failed recently and lost their job, with no federal bailout money to keep them afloat. That unemployed factory worker or company executive is looking at their tax bill for 2008, and knows that they still owe taxes (and perhaps in some cases can't even pay the tax bill) and that these tax dollars at least in part are going to prop up an industry that the government has decided needs to be propped up. (Granted, the government may be right about certain industries--perhaps say the financial industry is too vital to let fail, and a bailout is the best of bad options--but the unemployed factory worker or executive had no say in the matter)
To this unemployed person--who is wondering how to make ends meet on unemployment and savings and with few job prospects on the horizon--the complaints of bankers who have to accept pay caps as a condition of the federal bailout of their own company must seem particularly obnoxious, especially considering that these salaries are indirectly coming from the tax dollars paid by this unemployed person. Again, you take federal bailout money, you have to accept certain hardships--not just as a way of "punishing" the bailed out company but more to ensure that they're only taking the money if they really need it--an executive probably wouldn't accept bailout money he didn't need if it meant limiting his own pay severely. In a sense, they're taking it because they (on a personal level) would at least like to still have a job. That said, this shouldn't be so much about class resentment and punishment, but rather about the best way to get things back on track with the least amount of long term damage. And these bankers ought to consider lower (but still existing) pay as part of the tradeoff for bailout money that keeps their offices running and gives them a chance to make much more down the road when the bailout period has passed.
Maybe it's time to rethink the structure of their business. I was struck by: "Exhaustion is normal. One buddy stepped into his shower fully clothed."
My first job was at a small software firm, where I averaged 70-80 hours a week when at home, more when I traveled to customer sites. After 3 years I was really, really burnt out. One day I woke up in a hotel room and had to look at the phone book to figure out what city I was in.
I then worked at an aerospace firm that had carefully monitored the productivity of their software staff over the years. They found that consistent overtime reduced productivity and increased errors. Once you had been on 60 hour weeks (the maximum you could work) for a while they forced you to scale back for a few weeks to a 40 hour week.
My spouse is an anesthesiologist and she is given the day off after all-night shifts, unlike the surgeons and other residents and staff. Research had found that it was endangering patients if their anesthesiologist had been up for over 24 hours. More and more fields in medicine are realizing that working residents for 100+ hours/week is not good.
Is it any wonder that "They made colossal mistakes, to be sure"?
The colossal mistakes made by the financial industry are of a completely different nature than the ones made by exhausted developers and doctors.
I'm a developer too, and like all of us, I've put in some grueling hours at one time or another. I've made plenty of careless mistakes in the process -- using the wrong variable or function, forgetting to check all the edge cases, making a change to one section of code without fully calculating every other section which might be affected. Medical errors from fatigue are largely the same kinds of isolated mistakes, using the wrong medication or dosage, overlooking a minor symptom that should clue you in to a serious condition. In the computer industry, in medicine, and in plenty of other fields, those kinds of errors can be a big deal -- a single small error can completely break your software, or kill someone.
The global financial system didn't suddenly come tumbling down because a single banker somewhere made a bad call really late at night. It came down because an awful lot of people did so over and over again in broad daylight. Those are systemic errors, not isolated fatigue-induced carelessness.
I know it wasn't one single mistake but I have to wonder if a business where everyone is constantly operating with too little sleep and under strong time pressure is one that is prone to systemic errors. Its awfully easy to follow the crowd if you never have the time to sit back and think about long term consequences or the effect of rare combinations of inputs.
Well written.
I think one things that's missing is that a lot of us who have been working in other sectors have a feeling that "Wall Street" took on more than their share of the benefits of the "booming economy" of the past ten years. We were all running in place; they were doing great. Now we're struggling, and they expect to keep doing great.
This is compunded by the sense that, both then and now, Wall St. success is coming at our expense.
I'm not so concerned if someone comes up with a great product and makes a fortune selling it. Bill Gates can have his millions.
I am more concerned if someone makes a fortune by pressuring my employer to cut my health benefits, or increase my co-pays, or eliminate its 401(k) matches, or lay off my coworkers.
Now, maybe local management used "Wall Street" as a scapegoat for policies they favored for their own benefit. But I think there's a large sense that we paid those high salaries over the past few years through reduced employment benefits, and we're being asked to continue to pay them now through our tax dollars.
In any instance, I do hope that investment bankers have a greater sense of solidarity with the rest of us if and when this turns around.
I am more concerned if someone makes a fortune by pressuring my employer to cut my health benefits, or increase my co-pays, or eliminate its 401(k) matches, or lay off my coworkers.
Well, all of that wasn't so bad because our own 401(k)'s benefited from those very same pressures. That means we'd all be able to retire early, right?
Megan,
Having been in the work world for a few years I've become convinced that people earn their money.
Part of the high pay was to compensate them for the risk. They could have gotten decent jobs at the OCC or the SEC with great benifits and 100% job security but they took a gamble that didn't pay off.
What has really shocked me is how much pay people are willing to give up in exhange for job security. In my industry it breaks down like this:
Work for the state or federal gov't = 60 - 80k
Work for large stable company = 90 - 120k
Work for small consulting firm = 135 - 185k
Work for youself as a 1099 = 220k - 350k
In each case the more you make the greater risk you are taking and the more you have to work.
If risk is the justification for the reward, then when it fails there should be no whining. The definition of "risk" kind of implies that it might fail. The notion of an "entitlement" to income because of "risk" is just ludicrous.
raf,
If you leave your safe gov't job to make your fortune running a frozen banana stand and it doesn't work out - you have the right to be upset about it.
I can't imagine anyone not being upset when they take a risk and it doesn't work out.
Being upset and believing that you "deserve" a good outcome because you worked so hard are two quite different things. If I spend all my money on lottery tickets and lose, I will be upset. Will you be sympathetic? I took a BIG risk, and standing in line to buy all those tickets was very tiring. I worked hard, I followed the rules. I "deserve" to have won.
Perhaps a better way of saying it is: If you take a risk and succeed, you "deserve" the reward, even if it is very large; if you take a risk and fail, you "deserve" the consequences, even if they are very severe.
I guess I use upset in a different sense. I can see being dejected, disappointed, angry at myself, angry at others (if I thought that there was a person or persons who specifically interfered in my frozen banana stand's failure), or even angry at the world (if random events caused the failure).
I suppose that what I call angry at the world is what you are calling upset. I'm with raf, of course I might be angry with the world but that doesn't change the fact that I took a risk and should feel the consequences.
jmo:
There are a bunch of other things besides salary and job security that differ between those. The increasing salaries in your list also correspond to more likely trouble with health care (and less flexibility/support if your health fails), longer hours, and a lot less day-to-day predictability in your life. From experience, it is a hell of a lot easier to do the consultant thing when you don't have kids, and so getting a phone call on Tuesday telling you to be in California for a meeting Wednesday morning just means tossing clean clothes into your already-partially-packed bags and heading to the airport, not missing your son's birthday party and dumping a bunch of unexpected crap on your wife with no notice.
albatross,
You are 100% correct. I'm just shocked by how few people realise this is how the world works.
The biggest shock for me was to work with people making 80k who complained about how hard it was to make ends meet, pay for college, pay for retirement, buy a nice home, etc. I would tell them - "Just give me the word and in two weeks you can be making 250k." In upwards of 85% of the cases they say no.
I'm offering them the ability to pay cash for their kids college, pay off their homes, have their wives or husbands stay home, retire in their 50's all in exchange for a little extra work, a few hours a week on a plane, and slightly more risk. But no, they aren't interested.
"I'm offering them the ability to pay cash for their kids college, pay off their homes, have their wives or husbands stay home, retire in their 50's all in exchange for a little extra work, a few hours a week on a plane, and slightly more risk."
I wonder if it's even more risk. Since you work for yourself, I assume you have more than one client. Isn't that a safer position to be in than having one employer (except, perhaps, if that employer is the government)? For you to lose your income, you'd have to be fired by all of your clients; for an employee to lose his income, he just has to be fired by one person.
Most of the consultants I know make no more money than they did as employees. Their hourly rate is very high, but they spend a lot of time beating the bushes for clients and on running-a-business tasks for which they're not compensated directly. And they have trouble finding health insurance.
I was angry, but also deeply shaken, by the notion that I could work hard, do everything right, and still end up unemployed.
Yep. Happened to me in early 2003. Worked for a small defense contractor on a data interchange project. Very early work with XML/Oracle integration. After 9/11, and the resulting wars, the contract money got repurposed and the contract canceled by DoD.
Several of us got laid off, I spent most of a year and a half unemployed. That company is now much smaller, and completely out of the Federal space.
---
130 hour work weeks? Hope they have really good health insurance, especially mental health benefits. Because a few months of that can, quite literally, kill you. When I was in the Army I once went a week on 2 hours sleep a night. By the end of that week I was hallucinating, barely functional, and incapable of staying awake any longer.
I have a friend who started at GS right out school, his schedule was as follows: M-F 7AM-10PM, S-S 10AM-8PM. There were times where he had to worm more, but never less. He did occasionally (1 in 6 weeks) get 1 weekend day off. His first workday off was 13 months later when we made him go on vacation.
That's a 95 hour work week. Which is substantially less than 130 hours. If he went to bed at 11, got up at 5, he was still getting 6 hours/night of sleep. Assuming he ate meals at his desk, or took no more than 1/2 hour off for each meal, then he's doing OK. You can survive for a long time on 6 hours/night. Soldiers in combat do it all the time.
2 hours? Not so much.
That's the lowest her worked, there were weeks where he never left on the day he went in on (7AM-12:30AM) and days where he went in early (5AM-10AM), longer weekend hours, all nighters, taking 2 hours to go home, shower and change. His lowest was 95, his average was over 100 and had stretches in the 110-120 for weeks at a time.
worm more? That is one of the most appropriate typos I have seen in a while.
Yup - That's why I've found the Army to be good training for working in BigLaw. Of course, what worked at 25 REALLY sucks at 35. I assume that it'll be worse at 45.
On the upside, if I really screw up due to exhaustion, I can only lose huge amounts of money - before, I could kill people.
Megan,
You cannot separate the feelings people have about overpaid masters of the universe from the concept of market failure. The standard response we have heard from Wall Street to complaints about overpaid finance execs has been "the market determines our salaries, and our society believes in free markets." But a free market would today see the lot of them on the street selling apples. Instead the government rushes in and even if they take a temporary salary haircut they aren't returning all the dosh from past years of working in a "free" market.
If the market wasn't really free all this time then their salaries weren't really determined by some Utopian notion of markets. And the suspicion we all have now is that past years' compensation levels were actually driven by the massive moral hazard implied by the failed market.
Yes indeed. But the free market wasn't at work. The complaints of high pay aren't for people working for profitable firms, ones that were careful and didn't get caught in the spiraling mess. It is for firms that otherwise would no longer exist, but for the truckloads of money from the US government.
Government employ skews values. People that are necessary and central are not paid enough, people who could be replaced either individually or by contracting out are paid too much. We are seeing the skew happen in this instance.
Derek
Would it have been better if they had only been paid a third, or a tenth, or a twentieth as much? Would that make the recession significantly more enjoyable for the rest of us?
*
I think part of the objection to their pay is that people -- now at least -- speculate that if the compensation structure had been more modest, it wouldn't have encouraged the same attitude towards risk. The personal risks would still have been the same (you lose your job), but the rewards for risky behaviour would have been much less. The balance between the two wouldn't have been as extreme in favour of risk-taking.
*
Given that essentially no one saw this problem unfolding exactly the way it has unfolded, it's probably not the case that we would have avoided this -- at a very high level, this risk wasn't really on anyone's radar until too late. But to the extent people think the crisis in the financial sector was exacerbated by a cavalier attitude towards risk, e.g. in layering derivatives on derivatives, wouldn't it make sense to reduce the incentives to risk-taking?
I find the whole argument amusing. My pay, your pay, anyone's pay, from someone picking strawberries in a field to the latest hot actress, is determined by what you can get someone else to give you for your labors. The idea anyone "deserves" to be paid something is just silly. Take what you can get for your labor. If it's not enough find something else to do for a living.
The finance sector became bloated, and there are now far more people with finance education and experience than there are jobs requiring that education and experience. You'd think, of all people, Wall Streeters would understand supply and demand.
Oh, and tax money? Give me a break. What possible societal purpose would it serve to tax people who make things in order to subsidize people who move money in circles?
"hard disgusting manual labor"
Heh. I found proof that the world wasn't fair in a rather pleasant way. I was doing as described above, without the disgusting part. In a building housing a firm that hired university graduates to do their work. I was working around the desks, lo and behold a pay stub of some poor schmuck that probably still had tuition to pay off. It was less than what I got, a 2nd year apprentice, with 6 weeks formal schooling in the trade to that date.
Let's say that the world got considerably more unfair as I completed my apprenticeship and my remuneration increased.
Derek
I'm a surgical resident used to long working days and long working weeks. There is an exhaustion that catches up with you if you don't manage yourself right. Why do we all do it? How long do the I-bankers work that hard? most of them move on to other fields by the end of three years right? I will have to work like this for a total of 6-7 years. Throughout this time we tell ourselves there is a light at the end of the tunnel. for them it's the possibility of making oodles of money, the dream of retiring at age 40. for me its the dream of being my own boss, being a surgeon, and making a good living.
i understand the sense of entitlement that develops in these guys. Let's say your are 22, working your ass off on deals that are billions of dollars in nature and you see your bosses make off with millions in the process. of course you're going to feel entitle to get something...this deal wouldn't have gotten done without you. i understand the entitlement because we residents develop the same entitlement with less financial rewards at stake.
despite the similarities between the two jobs, at the end of the day i am happy with mine knowing that I have helped someone get through an illness, saved a life there is a tangible worth to what i do. and i don't necessarily have to justify my salary to anybody.
A number of thoughts on this subject come to mind:
I'll use the school system structure as a first example -
1. Teachers work, on average, about 38-40 hours per week. They have rock solid job security, work ~190-195 days per year, great benefits, and a pay schedule that ensures they are solidly in the middle-class pay scale after working 5-10 years. (defined in this case as between 50-75k)
2. Principles work 45-60 hours per week, have less job security, and work ~220 days per year. They have great benefits and their pay schedules ensure that they are upper-middle class in income. (defined here as between 90-150k per year)
3. Superintendents work 50-60+ hours per week and work approx 240-260 days per year, last on average about 2.8 years before they get replaced or move on, have great benefits, and their pay puts them on the brink of what most people would consider lower-upper class (180-250k per year).
This seems like a natural structure of work/life balance + skill set + available job pool vs. compensation. And it's taxpayer funded.
But in a private business? Why on earth would anyone be entitled to decide what a private business wants to pay it's employees, except the business owners? If they want to pay their CEO 90% of gross revenue, that's fine with me. Either the business will function, or it won't.
except the business owners?
And just who do you think owns, for example, AIG? GM and Chrysler? BofA and Citi?
We do. You and I. Taxpayers.
Yes, and that's a problem.
Exactly agree with Tsotha.
Oh, and we don't own GM and Chrysler. We just lent them lots of money. But lending money doesn't impart ownership, nor give an individual the right to dictate pay, until an ownership stake is obtained under the charter.
lending money doesn't impart ownership, nor give an individual the right to dictate pay
I dunno 'bout that. Bondholders usually have quite a bit of say-so in how a company is run. Often more than the stockholders.
I agree with most of this, but I wouldn't really say that teachers work only 38-40 hours a week, as this clearly doesn't include prep time/grading which alone are probably 10-20 hours a week.
Throughout this time we tell ourselves there is a light at the end of the tunnel. for them it's the possibility of making oodles of money, the dream of retiring at age 40. for me its the dream of being my own boss, being a surgeon, and making a good living.
Realy? Most of the Doctors I know (GPs, admittedly) are still paying off student loans at 40. Can a surgeon even finish residency and internship before his mid 30s?
I read this as meaning that investment bankers dream of retiring at age 40, not that a surgeon does. A surgeon has the dream of being his/her own boss, etc etc. You are correct that most doctors will still be paying off loans at age 40, and a surgeon will not complete training prior to mid-30s.
You are correct - I misread his post. Must be time for another dose of caffeine.
I know folks in the finance and consulting worlds, and it seems that the only ones that make it to the MD or partner level are those who, in my humble view, are the kinds of folks that are willing to spend their entire working life fighting for every dollar, trampling every opponent, and alienating everyone close to them.
I still can't figure out what the point is? Most folks I know in these professions figure out by age 30 that the brass ring they've been trying so hard to get - the summer house, the trips to Europe, the box at Giants Stadium - isn't even worth having if you're never around to enjoy it.
There's a reason that the happiest people I've ever known (in New York, at least) are firemen. I dare you to find a fireman who's unhappy about his profession - they work, then they go home and go fishing, or coach softball, or hang windows. Can anyone say they've ever met a truly happy consultant?
I'm not a consultant in a the typical sense. I'm a project manager and part of my role is providing consulting services for a very niche area of pharmaceutical development.
I'm quite happy, though I'm ambitious at the same time. Then again, I work 40-55 hours per week and make a good living.
Vince,
Much like TreeJoe I love being a consultant. I love the travel, I love the 14 free Frequent Flyer tickets I get each year, the free hotel nights, all the fantastic vacations I get for free. I love the money, I love the people I work with, I love all the problem solving the work entails. I love it!
I even love the TSA lady who said to me - "Wow, you're here all the time."
But again, I work for myself and bill by the hour. My customers usually have me budgeted at a strict 40-45 hours a week. So it's 8am to 6pm Monday through Thursday and I get Friday's off.
And again I work with people who make 1/3 as much as I do and I can't understand why they wouldn't trade an extra 6 or 8 hours a week on a plane for an extra 150-200k a year.
They don't make that choice because they value time with their family and friends that you don't get because you are in some other city M-Th. They value the fact that they do not have to go through a very risky startup phase where they are not earning a salary and have not built up a client network and reputation to earn the bigger bucks consulting.
Free Market is a theory... something to strive for, but it doesn't exist in the real world. I-banker's pay has never been decided by the free market. If it had been they might have been earning their bonuses when the company made money, but if it lost money: no bonus! And they might have been fired as well!
That's not necessarily true. A company losing gobs of money should still pay bonuses to employees who're keeping it from losing even bigger gobs of money. As long as they're doing it with their money I have no problem.
And how do you separate out the rare times that replacements would lose more money? All these bankers and their compromised boards think they are worth the money. If pay is not performance based, this is what we end up with - a lot people making your claim!
Well then, here's where the free market comes in. I don't have to separate out anything. That's what the management for the company does to earn it's own collective bonus. The free market doesn't guarantee people don't make mistakes, it just provides a mechanism whereby bad decisions are punished and good decisions are rewarded in aggregate. Companies who pay big bonuses to the wrong people will eventually go out of business as long as the government doesn't step in to prop them up with my money.
Again, you're assuming that a free market exists that way. If all of Wall Street(and it seems like that's the way it is) pays bonuses regardless of performance, the ones going out of business will not affect the performance -less bonuses of the survivors.
Again, you're assuming that a free market exists that way.
Again, you're assuming it doesn't without providing a reason why you think that. Are you trying to say it's not a free market because people are getting bonuses? In some industries it's understood you'll get a big bonus relative to your salary - that's part of the compensation package. If you don't it's a sign by the management that things aren't working out and you should be looking for a position somewhere else.
"it's a sign by the management that things aren't working out"
That's hardly a sign of a free market. And I'm supposed to "prove" that something you imagine exists?
Considering how well these guys have done for this country's economy, it would speak more to inertia as the cause of their ever increasing bonuses!
The magical Free Market! Dream on!
A lot of the bankers I know have been fired and very few have made bonuses. Most of the ones who did work in fields that are counter-cyclical or are really brokers who still bring in good business. Because of the blood baths at the banks, most of the bankers who are left are working their asses off covering for all their missing friends in office with crappy morale. All that said, if you take the King's schilling, well. . . let's just say I hope all this motivates them to pay back the TARP money ASAP.
"it's a sign by the management that things aren't working out"
That's hardly a sign of a free market. And I'm supposed to "prove" that something you imagine exists?
I'm not sure what you're trying to say. Are you saying there's some grand conspiracy limiting what you make and rewarding bankers? Are you saying companies are giving out bonuses because they're feeling charitable? Why is it you believe companies are giving out bonuses if not to retain employees who might go somewhere else?
Let me put it this way: If I were working at AIG, and Barney Frank was out there demonizing me and trying to blame me for the worlds ills so people would forget he's in it up to his eyeballs, you would have to give me an enormous bonus to stay and put up with that crap. To me, that's a free market - the company I work for pays me enough to keep me from taking another job, or I take another job. Why is that so hard to understand?
Holdfast: Tough for the remaining bankers, but that's no sign of a free market determining pay.
Tsotha: You bring up conspiracy, so no need for me to respond to any of that.
I you're not familiar with the backscratching between CEOs and fellow CEO board members, you need to spend less time on commentary and more on research.
Tsotha: You bring up conspiracy, so no need for me to respond to any of that.
That's a pretty novel way of disposing inconvenient arguments.
Of course I'm aware of the "backscratching" at the highest levels of companies. I forget, how many CEOs does AIG have?
This may be a dumb question, though I imagine someone here knows the answer. Why do Wall Street firms overwork their employees to such an extent? Why not hire more people and pay them correspondingly lower salaries? After all, a person who works 100 hours every week cannot be very productive a lot of that time.
I have the same question about hospital residents. I've always been a bit nervous to be evaluated by a guy who's been working for 18 hours.
Because there are costs to sharing information. The more people you have on a team, the more time you have to spend managing the information handoff. Easier to spend more on individuals and get more work. Plus in a tournament system, the more people, the less the chance of winning the tournament, and so the less they work, which means you have to pay them more.
But you find that kind of friction in every industry. In my business it's pretty widely acknowledged small teams are much more efficient than large teams. But it's also acknowledged it doesn't help the company when a key player has a stroke from the pressure.
Some businesses are relationship based. I suspect finance at that level is like that. A trader, banker, whatever has contacts, knows people, has done business with people, and can therefore crank out deals. And those people will search him out. If someone else answers the phone and insists on doing the deal, they will go to the other firm where they know and have dealt with someone.
Derek
Paul,
That is a great question. In my business I work with two main vendors. Vendor A hires people from no-name schools, works them 37.5 hours a week and pays them next to nothing. Vendor B hires the best people from the best schools, pays them great salaries, and works them 50-60 hours a week. Vendor B charges 4-8 times as much for their product.
Vendor B's product if much much better than Vendor A's - wether it's 4-8 times better is hotly debated in my industry. It should be noted that both Vendor A and Vendor B are large and very profitable businesses.
So, this leads us to the question: Why not open an I-Bank and hire kids out of SUNY-Buffalo and pay them 55k, work them 37.5 hours a week, and only charge 2% vs. GS or Morgan Stanley's 7%?
The key would be if I'm selling my consulting business for $100ish million and going with GS can get me 125 million while the kids from SUNY-Buffalo can only get me 110 million then it makes sense to go with GS.
The big question is - how much extra can the GS boys working 100 hours a week get me than the SUNY-Buffalo boys working 37.5?
Megan,
Because there are costs to sharing information. The more people you have on a team, the more time you have to spend managing the information handoff. Easier to spend more on individuals and get more work. Plus in a tournament system, the more people, the less the chance of winning the tournament, and so the less they work, which means you have to pay them more.
Then you agree with the 7% I-Banking fees?
Does hiring GS and having the Harvard/Princeton/Stanford boys, working 100 hours a week, going to mean you get a price for your company 5% higher than if you went with the SUNY-Buffalo boys who worked 37.5 hours a week but only charged 2%?
JMO,
There are plenty of smaller investment banks that don't limit their hires to Ivy League grads and don't treat their "associates" like crap. And many of them, unlike Goldman Sachs, made it through the last few years without government bailouts. I don't think their fees are too different than the big firms, but they focus on smaller deals.
Dave,
Then why don't those firms overtake GS or Morgan Stanley etc?
That's where the game is a bit rigged. Half the government finance ministers in the world (including Paulson) are ex Goldman or JPM execs. Who was it that held a gun to Bush's head saying "if you don't fork over bazillions of taxpayer dollars the financial world ends"?
The main reason is that many of these firms have remained partnerships. That's probably a big factor in why many of them haven't needed to get bailed out: since their own money and their families' money was on the line, they took fewer risks than the big firms. But remaining a partnership also makes it difficult to grow as big as a GS or Morgan Stanley.
That said, if the government hadn't bailed out Goldman and Morgan Stanley, one of those private firms probably would have overtaken them, since Goldman and Morgan Stanley would probably be out of business today.
"I work 60 to 80 hour weeks"
Really? I wouldn't have thought that based on your posting volume here and your usual lack of any posts on weekends.
I bet a lot of that time is spent "researching new material" (e.g. watching movies and drinking whiskey with her roommate).
That made me laugh so hard I started coughing.
Not to comment on what Megan does with her time, but, what does and doesn't count as "work" is an interesting question.
I had a buddy that worked for a major video game shop and put in hours on the close order of what Megan talks about for I-bankers (they put a lot of people in the hospital). So, you have a bunch of really bright, creative, hard-working people putting in, say, 100 hours a week on games that, really, weren't all that great for my taste (but made plenty of money).
In contrast, there's the guys that make Kingdom of Loathing. Now, I don't know exactly how many hours they put in on average actually writing code/content, drawing, testing, etc., but I'm betting that it's a lot less than 100/week/each. But, I'm pretty sure that when you throw in all of the reading comic books, watching movies, listening to music, browsing Jay-is-Games and playing World of Warcraft that they do, all of which are a legitimate and necessary part making their product, they probably spend at least as many hours on work related activity as the people at the major corporate shop.
Thing is, most of what the former group was doing at work was an incredible waste of time, effort, and potential, whereas the apparent slacking of the later group is largely responsible for creating what people like about their game.
So, maybe what I'm saying is that I'm suspicious of any "job" that takes more than even 50-60 hours/week, but I'm suspicious of any "career" that takes less than 90-100.
The burnout rate among the videogame writers who work at those places (EA is infamous for this) is very high. From what I hear it's over 90% after 5 years.
Belief that education, hardwork, and dedication will lead to achievement and rewards is a good thing. It doesn't always work out and much depends on luck, of course. Those are necessary but not sufficient conditions to success. If someone truly does not believe that education, hardwork, and dedication will lead to success, then I suppose that person would not put in the effort and will guarantee the outcome. It's better for society to organize around this belief. The "it's all luck" or "it's who you know" world is a lazy, bitter world.
These bankers truly believed in this meritocratic ideal. That's why they're discombobulated.
But it's not like they're all gonna be driving cabs. Even if they leave investment banking they'll probably get jobs making less, but not insignificant, money in a related field.
What kind of society do we end up with when entrepreneurial levels of compensation go to those who don't take entrepreneurial-like risks, or make entrepreneurial-like contributions? We end up with what we had over the last several years, when the financial sector generated ~40% of corporate profits, and then handed a huge bill to the taxpayers.
Entrepreneurial levels of compensation should go to successful entrepreneurs. When they go to smart kids who agree to get hazed for a couple of years, then more smart kids will volunteer for the hazing than will try to create useful new products or services.
What kind of society do we end up with when entrepreneurial levels of compensation go to those who don't take entrepreneurial-like risks,
*
Ah, but they do! With other peoples' money.
Phenomenal post.
You guys know that i-bankers don't set their own salaries, right? The labor market doesn't end at the corner of Wall St. and Broad St.
BANKERS GET PAID THE MINIMUM THEIR EMPLOYERS CAN PAY TO KEEP THEM FROM QUITTING, JUST LIKE EVERYONE ELSE IN THE WORLD.
It's not a magic formula. If someone else could do the job just as well and for half the money, you can bet your bottom dollar that every bank in the world would make the trade.
In a free market, we don't pay people based on how important their job is, or how many hours they work. We pay them based on what the labor market will bear.
Teachers make very little money because tons of people want to and can be teachers. Major League Baseball players make tons of money because very few people can be major league baseball players (although I suppose many want to).
The universe doesn't owe anyone anything, but if you're in high demand, you can expect your compensation to increase (and vice versa). That much is (and will likely always be) true.
At some point their pay is going to be more than they're worth, otherwise this competing against each other for the highest pay goes into the stratosphere and continues infinitely! It's time to let them move on and hire some fresh blood!
"BANKERS GET PAID THE MINIMUM THEIR EMPLOYERS CAN PAY TO KEEP THEM FROM QUITTING, JUST LIKE EVERYONE ELSE IN THE WORLD."
I would say this is not true in practice. Bankers (and everyone else) get paid much as they can sucker other people into giving them. Over the long haul, you'd expect what somebody can sucker somebody else into giving to always be pulled back toward what it will take to keep them from leaving, and at times they would be the same.
I don't get the animosity toward people making lots of money, but I do get the frustration people have that lots of people's retirement savings were funnelled to whoever as "bonuses" for performance that in hindsight was not good, and now it's the taxpayers footing the bill, including still supporting a pay structure that is probably inflated from the "false profits" that were generated in the past.
Instead of just stock owners getting the shaft in this situation (which would be good b/c they signed up for that risk), the schmuck making low six figures and looking at a lifetime of higher taxes b/c of the bailouts (and rising populist sentiment) is also getting screwed (which is not good b/c he din't really sign up for that risk). That's frustrating.
Greenburg imagines that bankers pay has a lot more to do with the free market than is actually the case. If their pay was market-based, these incompetents would have been gone long before they had the chance to crash the economy! The worst thing you can do is assume that a working free market exists in it's fullness, rather than it just being an ideal to strive for.
I'm reminded of one of my favorite television shows, Babylon 5, and a quote from one of the characters:
"Wouldn't it be much worse if life were fair and all the terrible things that happen to us, come because actually deserve them? So now I take comfort in the general hostility and unfairness of the Universe."
I like that one!
But, here is what I really want to know. Of all the well connected, Ivy Leauge grad, type A, workaholic, perfectionists who work in finance in America... Ken Lewis, born in Mississippi, raised by a single mom who worked as a nurse, graduate of Georgia State, is the CEO of Bank of America.
How did he do it?
He famously hates the investment banking business. Came up through North Carolina based NationsBank when Hugh McCall was aggressively rolling up regional commercial banks in a manic growth strategy. They effectively bought into Wall Street by purchasing Montgomery Securities in late 90's. When NationsBank merged with BofA, they also got some of BofA's investment banking business. They're "Wall Street" because Gramm-Leach-Bliley erased the distinction between Wall Street and Commercial Banks. Lewis was one of McCall's Southerners and he won the succession contest.
This history is very different from the classic New York prep school, Ivy League heritage of say Morgan Stanley.
I'm not sure if this is a rhetorical question, since you seem to know enough biographical details of Lewis to know the answer, but for everyone else's benefit:
Lewis joined the organization 40 years ago, when it was a small regional bank in the Southeast. That small regional bank grew via acquisitions and became NationsBank in 1991 and then bought Bank of America (which, at the time, was large regional bank in the West) in 1998. In short, he didn't get hired by the Dow Component, too-big-to-fail bank that BofA is today; he got hired by a small regional bank and worked his way up as the bank itself grew.
Dave,
Not a rehtorical question at all. The only things I know about Ken Lewis, I read on his wikipedia page.
It's the "he got hired by a small regional bank and worked his way up as the bank itself grew." that I'm curious about. The fact that as the bank grew in profile and began recruiting ever more expensively educated staff, none of those newly hired hot shots were able to push him out.
From what little I know, the only theory I can come up with is what he lacked in academic prowess, connections, and pedigre, he made up for in sales and political skills.
JMO,
I don't know that he lacked in academic prowess. State schools have some sharp students too. Heck, Andy Beal, a self-made billionaire and highly successful banker, is a Michigan State dropout. Lewis certainly had plenty of connections within the core of the firm, since he had been there for decades. Generally (though not always), acquiring firms dominate the hierarchy of the combined firm, and he had the advantage of being a veteran of the acquiring firm, through several iterations of the process.
"The fact that as the bank grew in profile and began recruiting ever more expensively educated staff, none of those newly hired hot shots were able to push him out."
I don't think this is that uncommon for major firms that got their start as regional firms, and maintained their headquarters in those regions. The chairman of Wal-Mart, for example, is a Pittsburgh State grad. Think about it: imagine you are the product of a state school or local university in Charlotte, NC or Plano, TX, and -- together with guys like you -- you have successfully grown your business into a powerhouse over the last few decades. When it's time to pick your successor, who would you prefer, someone who helped your firm get there, or an Ivy League alumna such as Megan McCardle to take your firm to the next level?
I take the point that there is friction in the market, and that some people might stay even with long term pay cuts, but that's a structural argument, not a "greedy bankers taking greedy salaries" argument.
.
This oft-quoted meme about "false profits" being funelled into performance bonuses while the "common man" bears the brunt of the financial crisis has never rung true for me, though.
.
First of all, they weren't false profits. They were actual profits. Down cycles do not invalidate up cycles. The 90s were very good for everyone - not just for bankers, and what the bankers did enabled everyone else to do well.
.
Secondly, variable compensation (I've come to hate the word "bonus") was down roughly 40% on Wall Street in 2008, and the more senior you were, the higher your cut was. The folks that took the risks and reaped the big rewards in the 90s took it on the chin (as they signed up to do) in 2008.
.
Finally, @johnw: I think if you look closely, you'll find that the true incompetents (the CDO traders that didn't hedge at all, or the boutique mortgage lenders who wrote loans to unqualified borrowers and then securitized 100% of them to avoid capital reserve requirements and earn easy commissions) were indeed the first to go. Jake DeSantis said the same thing in his now-famous resignation letter, as have many others. To paraphrase candidate Obama: in leveling critcism, you're using a hatchet instead of a scalpel.
Looking at it the other way: Why would the worst crash since '29 lead to a drop of only 40% in bonuses (lets call it like it is)?
I don't see anything here that shows that a Free Market has anywhere near the influence you like to think on executive pay.
I'm all for attempting a free market, but let's not allow our enthusiasm to get the better of us. It's a theory. The real world doesn't track with it.
I'm sure this isn't a technically correct definition, but I would classify some of the profits as "false profits" b/c they came from deals that were always going to lose money. Down cycles don't invalidate up cycles, but if a bank charges a fee to issue a non-conforming loan in December, knowing that the loan will likely default in January, did that loan really create a "profit" in December?
I realize that's a simplistic view, but weren't a lot of the "profits" the same thing, fees generated at the cost of taking on loans that were very likely to default later on? Isn't the only difference that the "profits" were made over several years before the banks had to admit to the costs associated with generating the "profits"?
@johnw: It was a 40% drop this year, following a ~20% drop last year. The last time that happened was the dotcom crash of '00-'01. In fact, if you go back and track bonuses against just about any metric (stock market performance, bank profitability, etc.), I think you'll be pleasantly surprised at the correlation. Although we should note that it's never been a 1:1 correlation, nor should it be. Employees don't bear 100% risk on the success of a company - otherwise, they'd be owners. In good times, they see increases that are less than the total pool of money made, and in bad times, their "hit" is less than the money lost.
I understand the anger/outrage/schaudenfraude, but I don't understand the need to equate "bankers" in general with criminals. That's a charge someone's got to prove.
@Johnson_85:
if a bank charges a fee to issue a non-conforming loan in December, knowing that the loan will likely default in January, did that loan really create a "profit" in December?
If the borrower made his payment in December, then yes - it did. This is a separate quesiton, mind you, from whether the loan should have been made in the first place. That said, remember that depsite the market pricing as if 100% of the mortgages in America would default, the number never got higher than 20% - and is likely not to. The housing market collapse led to a MBS market collapse, but there was (and is) a fair part of emotion in play here as well...
That one surprised me too, but after thinking about it, I can buy it. Part of what she does is comment on what others are saying; to do that, she has to go find out just what that is. So, when I steal a few minutes from my workday to see what Instapundit has to say, I'm goofing off. But for Megan, it's vital research.
Not exactly a back-breaking (or soul-crushing) line of work, but there you go.
Why would the worst crash since '29 lead to a drop of only 40% in bonuses (lets call it like it is)?
Because the people who can still make money in a down market, become even more valuable in times like these.
Also, most people are all too willing to take no for an answer. You work for a company that decides to expand into the frozen banana stand business. While you're still making money the frozen banana division is hemorging cash so your boss says - "Sorry, no raise this year."
Upwards of 85% of the people I've worked with will just accept that. To look for a new job, that would require putting their resume together, seeing if they can still fit into their interview suit, the new job might involve a longer commute, etc. etc.
One of the reasons this group of people ended up making so much money, perhapse at the expense of others, is they are among the few who actually care what they make.
Sorry, for clarification that last paragraph should read:
"One of the reasons these bankers ended up making so much money, perhapse at the expense of others, is they are among the few who actually care what they make.
Sure, some would make money on the down market, but to the tune of 60%?
Isn't the Banana Stand scenario an argument against 60%?
Look, I like policies that pursue free market principles. What I don't like is people assuming that pursuit is the same as attainment.
Greenburg doesn't like the bailouts? Well, I don't either. But you have to remember that a big part of what got us to those policies was that a lot of high up people - in government and business in general - believed that there was a fully formed, functioning free market out there looking after things. There wasn't and isn't!
Isn't the Banana Stand scenario an argument against 60%?
I most cases the vast majority of Americans would just accept their boss saying, "I know your division made a ton of money this year, but the we lost our shirts on the banana stands, so no raises this year." Management would be confident that most people don't care enough to quit.
In finance, you are dealing with people who care very much about money and status and they would be very likely to quit. They are also much more intune with the amount of revenue and profit they generate and are good at selling themselfes to potential new employers.
The "good at selling themselves" I can see to a limited degree, but with the economy in the crapper, there's not going to be too many to impress with the amount of revenue they generate.
Look at it this way: You're the board and you've got an exec with all kinds of charisma... he blows you away with his personality! But he's made some decisions, terrible decisions that have just about sunk the company. Is it free market compatible to reward him for his personality and forget that he's lost all that money?
The point of this post is that we should understand the sense of entitlement that i-bankers have because they have jumped through the arduous hoops and have worked so hard in anticipation of them.
Now, you're telling me that the reason they were paid more than me was because of their superior negotiation skills.
So, when the pie got bigger, they got more than their share.
I think your 85% of people may grumble a bit about that, but accept it. We've got families to take care of. If someone wants to fight to get a 5% raise rather than a 4% raise, they can have it.
What we're not gong to just accept is that when the pie shrinks, they get to keep their oversized share. Now things are a little nastier, and more of us care.
I think your 85% of people may grumble a bit about that, but accept it. We've got families to take care of. If someone wants to fight to get a 5% raise rather than a 4% raise, they can have it.
For those who work on the corporate side of my business, no one ever gets a raise or promotion. The only way to move up is to switch jobs. That being said, I might work with two guys who do the same job and one makes 125k and the other make 65k. Why? One switched jobs every 2-4 years and the other has been at the same company since college.
Now, who is to blame for that income inequality? The guy making 125k, the company, or the guy who isn't willing to put his resume out there and switch jobs?
I honestly don't think the vast majority of people should be angry with the bankers, they should be taking lessons from them. That being said I applaud your anger - but it should always be present and more people resent being exploited the lower the amount of income inequality.
The irony of this whole wall-street/finance entitlement syndrome is even better if you compare it to public reaction to the beginning of the "white-collar outsourcing/downsizing" trend several years ago. Many of the same finance people who now are lamenting the unfairness of their pay reductions in light of how hard they work were the same who argued (rightly!) that engineers had no right to expect a certain salary, that pay is only loosely correlated to work, and that the market is not "just". Somehow this lesson wasn't internalized.
Johnw
But he's made some decisions, terrible decisions that have just about sunk the company. Is it free market compatible to reward him for his personality and forget that he's lost all that money?
From what I understand all the people who were responsible for losing money were fired a while back. The people who are still there are the guys who helped California sell a new issue of General Obligation Bonds. Or the guys at GS who made a fortune on the collapse in commodity prices.
If your the guys who were able to convince Pimco or Met Life to buy those California bonds, I'm sure a great many states and municipalities would be interested in your skills at selling distressed debt.
"all the people who were responsible for losing money were fired a while back."
Make that some and I'll agree.
He might get a job paying a lot in sales, but does he deserve a bonus for his current work?
Selling muni bonds actually doesn't involve a lot of talent or salesmanship. It's pretty cut & dried, if you ever speak to someone who has sold them and is honest about it. I also don't think most retail investors (those who buy these bonds directly and those who buy them through their muni bond funds) think of them as distressed debt (yet), though I think they should be less sanguine about the default risks.
The muni bond racket has long been a lucrative gig for well-connected local firms, and an easy way to open relationships with high net worth investors for bigger firms. It's much easier to sell a dentist an muni bond than to sell him a stock.
This post misses a vary important and evident ingredient of people's sense of "earning" and "deserving" that the more libertarian oriented minds tend to neglect.
A brief introduction. Free markets are typically defended on 2 main arguments:
- a moral one - free markets naturally occur when you allow the maximum of... well, freedom. You favor minimization of regulation and meddling by the state because you see it as an illegitimate, hence immoral, source of coercion.
- an empirical one - simply put, having free markets makes, most of the times, life materially better for most people.
Now, I suspect people in general are not very sensitive to the first type of argument when in comes to most activity of financial markets. In a sense, we lose economic freedom if we're forbidden from trading Credit Default Swaps. But one suspects there will be very few riots and upheaval from the loss of this freedom.
What Megan's post forgets is the second argument. The post muses about people's sense of fair pay and deserved compensation. But hard work, long hours and high pressure in an unpleasant task is only part, and the smaller part, of this sense of fairness.
In general, we don't have great respect for someone that spends 16 hours a day in a voluntary Sisyphean task (1- Roll a boulder up a hill. 2- Watch it roll back down. Repeat). If some wacko is willing to pay the big bucks to have a bunch of employees doing this all day long, the rest of us tolerate it out of respect for the moral argument of economic freedom. But we certainly don't admire it as we may admire, say, a Thomas Edison or an Alexander Bell.
But the feeling most people have is that Wall Street did something much worse than a Sisyphean task - people were getting the highest compensations in the country for engaging in an activity that, in the long run, has the side effect of screwing everybody else. Ok, this may be an unintended side effect, but that doesn't make things much better for the people losing their jobs or bailing out the banks.
Sure, financial markets are essential to a healthy economy, giving credit to good ideas, increasing opportunity, yada yada. But... paint me a socialist, what does society gain from the current state of the financial markets, as opposed to the, as Krugman calls it, boring banking of thirty years ago? There's more widespread access to credit, but we learned the hard way that this is not necessarily a good thing.
So, quite frankly, there's no great need to theorize about bankers misplaced sense of entitlement. Bankers' pay are justly thought of as undeserved and outrageous.
If bankers are individuals who work very hard, sacrificing weekends, personal lives, etc. at a job who causes harm to other people, they should expect to be despised. Not in spite, but because of their diligence.
An excellent, well-articulated comment.
But the feeling most people have is that Wall Street did something much worse than a Sisyphean task
Right, which is why a true free market system would let these guys fail instead of bailing them out.
But... paint me a socialist, what does society gain from the current state of the financial markets, as opposed to the, as Krugman calls it, boring banking of thirty years ago?
I'm not going to paint you a socialist for THAT. Society doesn't gain from the centrally controlled monetary policy run by the Federal Reserve. If you had competing money, sound money would win out over the funny money forced on us by legal tender laws, especially since, oh, about 30 years ago, when Nixon closed the gold window.
So, quite frankly, there's no great need to theorize about bankers misplaced sense of entitlement. Bankers' pay are justly thought of as undeserved and outrageous.
And their pay was only made possible by aspects of the American financial system that were, well, unfree. So you can't blame a free market. In a free market, people would rather deal with honest men than criminals, at least usually (i.e. during non-mania eras).
Now I'm sure johnw will point out that there never was and never will be a free market. And that's an interesting line of thought. Free markets are still better, but they will only remain free to the extent that the mass of men are honest, educated, and willing to take action to keep them free. Otherwise, the selfish, greedy men will use subterfuge to obtain power and force unfree markets on the masses. They will then use their power to do things like, say, what investment bankers have by buying up the world with 30:1 leverage.
What seems to be missing from the sense of entitlement of some bankers (and the one Megan admits to have had initially after getting her MBA) is of any connection between compensation and creating something or providing a service of value. That's ultimately where the money to pay you comes from. It's not enough to be smart, go to good schools, work hard, etc. You have to add value, or be lucky enough to work for a firm that does and is generous in sharing its comp.
A lot of the current frustration with pay at bailed out firms comes from the knowledge that these firms not only didn't add value in recent years, but actively subtracted value, by generating huge losses, destroying shareholder wealth, and needing tens of billions of dollars of taxpayer money to bail them out. If it were true that everyone who was responsible for those losses was already out on his ass, people might feel differently, but that doesn't seem to be the case. Even the guy who ran the London unit of AIG that caused its huge losses was getting a huge consulting fee after he left the firm.
That's more of an argument for not bailing out financial institutions than for lower compensation. I don't care how much anyone makes until they get me involved.
I guess I could have been clearer. I was attempting to make two points there, neither of which was to argue that anyone's pay ought to be arbitrarily lowered.
The first point I was making is that it seems odd to me for anyone to feel entitled to a certain income because they earned a degree from a prestigious school or otherwise worked hard earning credentials. I mentioned the reason it seemed odd to me, the apparent disconnect (or lack of interest) in some people's minds between the value they add and the income they expect. Ultimately, some product or service of value has to be sold to generate the revenue that pays a private sector employee's compensation. If you are at the point of the spear in creating that value -- say you're the one who created the company's best-selling product or service, or you're the one who brought in its biggest client -- then I can see how you might feel entitled to high comp: you've added a lot of value. But if all you've done so far is get a degree in the hopes of working as a cog in a well-connected firm -- I don't see why you'd feel entitled to anything. That's just my opinion, and not an argument for what anyone should be paid.
The second point was to explain why I thought many people were frustrated by the high comp at bailed out financial firms.
Setting aside bankers for a moment, people wonder why corporate management gets paid more than workers. There's a reason for it. In the abstract, management's job, poorly done or not, is to make decisions with potentially far-ranging consequences under conditions of great uncertainty. Making decisions under uncertainty is incredibly difficult -- Robert Rubin's (yeah yeah hold your chuckles) post-Clinton memoir and speeches drove this home. Most people do it poorly, or never have to face that choice, and certainly not on a daily basis.
And so people who can consistently make good decisions are extremely valuable. Thus that particular labor skill is much more valuable than, say, picking up a car frame from point A and moving it to conveyor line B, where strength and reliability are key (albeit replaceable) but there's no uncertainty to deal with. Of course, decisionmakers are only human and can make catastrophic errors in judgment (e.g., allowing AIG FP to run wild, green-lighting Bay of Pigs, etc), but there is a particular skill and a talent involved that employers will pay up for, and many would argue this is the most important skill society can demand. Society certainly has no problem rewarding other valuable skills, like creativity, entrepreneurship, or the specialized skills requiring years of expensive education (e.g., medicine, law).
My point is, pay and compensation aren't just about hours worked, or paying that overtime cost for the extra 30-50 hours in the Aeron saddle and the personal life, health, and happiness being foregone. Or beating the market 100% of the time, what value you produce, or how much America supposedly owes you for ostensibly creating the middle class. The inconvenient truth is that some forms of labor are simply more valuable than others, and the existence of pay inequality hardly means the system is flawed, but is rather a natural consequence.
Megan
A great post, and well worth however many hours you put into it. Also a thoughtful and interesting comments thread, which removes my lingering doubts about the comment registration process. Keep up the good work, ladies and gentlemen.
Everything I have read here makes me glad my chosen career was in beekeeping, despite the ever-present hazard of aggrieved insects.
It's no wonder our financial system fell into crisis and now rides the brink of failure; the people who manage it are sleep deprived.
Sleep depravation seriously impairs a person's judgment.
Great post. The other issues, though, are: the high pay actually contributed to the financial chicanery. And: remember how they used to say that just because they were making more, it didn't mean other people were making less? That turned out to be wrong. And, finally: guess who else works crushing hours, reports to bosses at multiple levels, and has constant transformations in an incredibly complex agenda? Suffers from exhaustion, burnout, etc.? Elementary school teachers. Maybe they deserve to earn $400,000 a year minimum, too?
Yeah, crushing hours like 7-3 M-F, 9 Months a year (~190 days), with multiple vacations in the middle to break it up. That's totally the same as 90+ hour weeks for 50 weeks straight.
The bosses issue is possible, but how many 'transformations' happen in a school year? This smells like BS.
Really, you have anything to back up Elementary school teachers getting burned out in the sub ten year mark?
Also, don't forget to factor in near perfect job security - which the bankers have 0, as evidenced by the 6 digit numbers of unemployed ones right now.
But hey, if you can convince their bosses to sign on to it, and generate the requisite revenue to afford it, more power to you.
There are school teachers getting laid off all over the country as communities cut back on their budgets; the job security you speak of is not real until you're tenured..
And you obviously haven't spent any time with a teacher outside the schoolroom; they work very long hours preparing lessons and correcting papers. They also typically spend money on items for their classrooms out of their own pocket on a regular basis.
The summers off is one of the only things that save them from quick burnout.
If we're counting out of office time into the equation, you have to bump that i-bankers up as well. While there is probably not as much personal time eaten up by this, that's a function of there not being much of it to begin with.
Summers off, weekends off, a few weeks in Dec-Jan, 1 week in March/April...
I'm not saying the job is easy, but it is laughable if not outright dishonest to make the comparison Matt was making.
If you need to make this comparison to a non-finance worker, I'd suggest looking at tunnelers, miners, oil-riggers, and truckers. Those are all a much better fit.
I would have said mother's of new-born babies.
They surely deserve $400,000/yr. for bearing the next generation. And we should forbid all birth control, abortion, and make sure all men of a certain age take viagra.
Perhaps not everyone here understands that an "investment bank" has multiple segments. Typically, these include (1) investment banking, which is primarily M&A advisory work and securities underwriting, (2) sales and trading, which includes trading stocks, bonds, currencies, and commodities, both to fulfill customer orders (flow trading) and for the firm's own account (proprietary trading), and (3) asset management, which is managing money for institutions and individuals and includes the traditional stock brokers.
Different firms may be stronger in different segments, but generally, after the dot-com period, sales and trading has been a much larger component of investment banking revenue than investment banking itself.
It's the actual investment bankers who work the hours Megan describes. Sales and trading people do *not* work 100+ hour weeks. For them it is more like 10-12 hours a day with only rare weekend or holiday work. Pay is roughly comparable to investment bankers, however, at least at junior levels. However, to the rest of the world, they all appear to be "investment bankers" and may hold themselves out as such.
The one group that works insane hours that is not mentioned here is people in the film industry. In Hollywood, "full-time" starts at 12 hours a day, 6 days a week. 72 hours. That is considered the minimum. Overtime is standard.
One big difference between Hollywood and, say, investment banking is that investment bankers work in air-conditioned offices and don't have to do any heavy lifting. Many people on a film set are literally doing heavy lifting - a 10,000 watt light is not a small piece of equipment. And they have to do it incredibly fast. That 10K light is being rented for hundreds of dollars a week. So is just about every other piece of equipment, including the camera, which might cost $400,000. Each lens could be worth $25K. Time is quite literally money on a film set.
And there's a good chance that the work is being done outside, in high heat.
The one good thing about the industry is that there are union regulations about how much time off crew gets. It's called the 12-hour turnaround - at least 12 hours off between working days.
The flip side of the insane hours in difficult conditions is that the pay is good enough that when a shoot is over, crew can take several weeks off before their next gig.
I-bankers really have lousy jobs that at least partially explains their pay. I have a few friends that took significant pay cuts by choice to get out of i-banking. (This was a few years ago during the boom!) The idea of willingly taking a pay cut for a different job is foreign to most Americans. However, it occurs regularly in high end ibanking, law, and management consulting.
Megan,
Good article, but a few comments.
1) Most bankers don't have a sense of entitlement about their pay. In my experience most people thought it was bizarre to get paid so much money.
2) Bankers get paid a lot of money because they produce big profits for their firms.
3) The firms would not make nearly so much money if they were operating in a free market, but they are not. The reason they make so much money is because a) the government has created barriers to entry, b) the government provides an implicit guarantee to their creditors for which the banks paid nothing, and c) governments have created a mass of tax and accounting rules which allow industrious and clever people to profit by devising transactions leveraging these rules. Blaming the bankers for defective government policy is like blaming Pavlov's dog for salivating.
4) Bankers also get paid a lot of money because they only last about as long in the job as NFL players, and many come out with skills that have no use outside of the banking world.
5) Smarter bankers don't work quite as hard a Megan describes. In my experience less competent (in a relative sense) workers tried to compensate by working longer hours.
6) It's a shame that the brightest and most hard working young people go into banking, but as long as we have market distorting government policies that allow the banks to make oodles of money, this isn't going to change.