Chris Swann today delivers a slightly more grown-up and footnoted version of my television rant from yesterday about how banks are paying their employees far too much money; I agree with almost all of his conclusion.
Excessive banking pay is a social ill. The sector has long sucked in far too much of society’s brightest graduates — putting them to tasks which often have little social value and at worst are parasitic. Politicians should not regulate bank pay directly. But lower compensation for bankers will be a sign that regulatory reform is working.
The bit I disagree with is about politicians regulating bank pay directly: I see nothing wrong with a Feinberg-style pay czar preventing banks with implicit or explicit government backstops from taking on too much risk.
The really ironic thing to all this is that paying star hires lots of money doesn’t work. Jeffrey Pfeffer puts it well:
When a company hires a star away from another firm, the star’s performance falls (46 percent of the research analysts did poorly in the year they switched jobs and their performance remained lower even after five years), there is a decline in the performance of the group the star joins, the market value of the company hiring the star falls, and the star doesn’t stay with the new employer for very long…
Chasing talent doesn’t work and just costs the companies doing the chasing a lot of wasted money… And there is another lesson in this sorry tale: the banks and securities firms who defend the practice of chasing stars as a justification for outrageous salaries are either being disingenuous or they really don’t fully understand what makes companies in their industry successful and the empirical data on the ineffectiveness of a “war for talent” strategy. Given their financial performance, the latter — pervasive ignorance of the determinants of success — is a real possibility.
Perhaps what we need isn’t a pay czar using draconian powers to cap executive compensation, but rather Pfeffer and his biz-school ilk (Boris Groysberg, Lucian Bebchuk) going out on tour to the boardrooms and C-suites of the major banks, explaining, with full empirical backup, that there really isn’t any point in entering into hiring wars. It’s not only harmful to taxpayers, it’s contraindicated from an internal profitability point of view as well.
As TED says, the only way to become Goldman Sachs is to grow that culture “organically, and slowly, over time”. CEOs in a hurry won’t like that conclusion. But it’s inescapable.