We all know that top bankers at large banks get paid vast sums of money. But quite why is still a matter for discussion. It isn’t, cannot be, simply because bankers are greedy. We know that everyone’s greedy so that’s not an explanation of why some and only some are getting the big bucks. An interesting piece of research gives us further insight:
The next step is to look at executive pay. Unsurprisingly, the chief executives of the big banks come out on top. Between 2010 and 2013, the median total pay, including cash and stock awards, of the CEO of a large bank was more than $57 million, $22 million above the median compensation for the chiefs of smaller firms, according to Mr. Cannon’s research. What drove these paychecks? Not performance but size. Mr. Cannon found no apparent links between compensation and shareholder returns, but he did discover a robust connection between a bank’s assets and its officers’ pay. “There is strong evidence that size has been the key driver of bank executive compensation since the financial crisis,” his note concludes.
People who run larger banks get more money than those who run smaller ones. And that’s just about only connection to pay that we can see.
So, if you want to reduce top bankers’ pay then reduce the size of the top banks: and since we want to do that anyway, to get rid of the whole idea of too big to fail, why not?
But what this is also telling us is that in the current system the banks are behaving entirely rationally. Or at least potentially so according to the idea of efficiency wages. This is often put forward by Chris Dillow, the thinking man’s Marxist. The larger the organisation, and the less detailed oversight it is possible to have of the people running it, the higher the efficient level of wages to pay to those running it. Simply because there’s more shareholder value for them to lose if they mess up, and there’s more for them to steal if they’re that way inclined. We could describe it as bribing them to stay attentive and honest and if that’s the way you want to describe it then fine. But it is also efficient, which is why perhaps people do it.