Wall Street Occupations – An Example of Excessive Compensation?
Wall Street Occupations Published on Mar 4, 2016
Moral Hazard and Specialisation lead to very high level of compensation, which Ulf claims to be efficient. While the level might possibly be unfair, it is nevertheless the optimal structure given the constraints of the industry.
Contributors: Professor Ulf Axelson, Dr Tom Kirchmaier
Wall Street Occupations
0:12price is actually on pay pay on Wall Street something we all concerned about
0:29boy everybody has an opinion about it what’s your opinion about it yes there’s
0:35no denying that pay has gone a lot over the last in particular 3d in finance and
0:44it’s been a concern for for a lot of policymakers and pundits and we end this
0:53paper or trying to try to say why it may be that the pay is so high on Wall
1:02Street relative to normal jobs why is it so high wow what we claim is that it’s
1:09due to a combination of two characteristics of many of the types of
1:13jobs you have on Wall Street one is that it’s actually very hard to see exactly
1:19what people are doing in the sense of all day putting in the right effort
1:24that’s what we call moral hazard problems and the other is that in the
1:29finance industry it’s very efficient for one person to handle a lot of money so
1:36we have a combination of people handling a lot of money and they can quite easily
1:42screw up by actually losing all his money and what we claim is that these
1:47two characteristic makes it quite important to incentivize people not just
1:53grew up by paying then quite a lot
1:57large bonuses now we also say that it’s not because they’re special or
2:03particularly good relative to other people in the world so in some sense
2:07we’re taking in people who are just normal people and they were paying them
2:13a lot
2:13not to screw up
2:15and doesn’t work it’s very hard to say how well it works actually we predict in
2:24our theory so this is a pure theory paper we actually predict that this is
2:30going to work better in bad times that in good times so in good times we
2:38actually predict that not only will pay and bonuses be higher but these finance
2:44workers will take more risks and do worse type of investment said they would
2:50another time so they actually screw up more in good times and in bad times so
2:57in that sense it doesn’t work perfectly what we claim is that there is no really
3:04good alternative
3:05how to setup this industry so this is essentially in the best you can do given
3:11the problems that are out there so the market
3:14kind of souls to pay problem I wouldn’t say they solve it so we gonna end up
3:20with inequality that’s because getting one of these jobs is in some sense an
3:26unfair lucky draw and you get so you get any quality and you still have people
3:35doing the wrong things so the market doesn’t perfectly solve the problems but
3:41they probably do a better job than alternative mechanisms that we can come
3:47up with such as putting a government putting up a cap or something removing
3:53the right to put bonuses what we claim this paper makes no sense in a way but
3:59it also means for policymakers that barking up the wrong tree
4:05you know by trying to regulate bankers pay you should just leave the market to
4:10it that’s what you saying well I mean at least we’re providing you know why you
4:15should be a little bit too careful about the type of regulation
4:19impose on the imposed on the industry it’s not enough to say look things have
4:25gone wrong during these periods are these periods and therefore we should
4:30regulate the way bonuses you may be throwing out the baby with the bathwater
4:37so we’re just giving that argument I don’t want to say I don’t want to make
4:42excuses for some of the decisions that were made saying the financial crisis
4:47because obviously a lot of it was done solely through ignorance but also
4:51through right Alex fraud and we’re not trying to apologize for the fourth at
4:56Bayview well what are you saying his to contractual arrangements that I know I
5:00optimal but still there has to be some Calvin and wanting mechanisms in the
5:04bank exactly so the perspective we’re taking is actually optimize a governance
5:13structure of the bank you still gonna have many of the observed patterns that
5:19we that we see in real life in terms of their pay structures and potential
5:24problems that the financial industry might get into now and then of course
5:30we’re not saying that they know necessarily have optimized the
5:33government structure but the fact that we’re getting to his troubles it’s not
5:36necessarily evidence that they’ve done something wrong with the government’s
5:41like nobody implications important at least to me is like new government stay
5:46out of regulation of bankers pay the banks to govern himself and then hold
5:52them accountable in various ways there that’s the argument we propose I just I
5:58don’t think I want to sign off on that blood since you said you know people
6:05have a dozen lucky draw when people get this job in the paper you talk of
6:10winning the lottery
6:11what do you mean exactly right socially what we mean is that it’s not the fact
6:18that you are especially talented hard-working that gives you the Hyperion
6:26get in finance
6:28it’s essentially a page that once you put anyone into that job you have to
6:33give in order for them not to do the wrong thing that is going to mean that
6:39anyone who gets this type of finance job is actually going to be better off than
6:44people who didn’t get it because I gonna get this high paid they’re still gonna
6:49be better better off so what we gonna see is that and I think this is
6:54reflected in reality that investment banks for example get thousands of
6:58applications for for each job and then some lucky guy just happens to get the
7:05job and he’s gonna have to do better in life than the people who didn’t get the
7:10job done us
7:16second best job in the world so in the paper also talked about brain drain you
7:21know you say maybe these people will be much more productive going to an
7:25unregulated into a non-financial sector that’s right so that is one of the
7:32unfortunate consequences of the fact that you have to reward these finance
7:38sector employees with such high pay what doctors can mean is that everyone is
7:46going to want to become a bank or a trader even though they are actually
7:51more talent is doing engineering or doctors or working for the government
7:57and even though society would potentially benefit more for having them
8:01in those professions so we’re going to see a brain drain from those professions
8:07into finance because of the high pay and other social costs that this sector
8:14imposes on the rest of the economy
Wall Street Occupations
8:17it’s a wonderful evening of thank you very much for coming in thanks so much
8:21for having me thank you
Wall Street Occupations
