In another piece on bonuses at bailed-out banks, NYT columnist Joe Nocera lets out a real whopper.
The truth is, Wall Street simply pays its people too much money. No other segment of industry pays out 50 per cent of its revenue in bonuses, only Wall Street. In no other segment do so many people get rich for doing so little for the broader society. As it happens, Mr. Feinberg made this point, at least inferentially, when he issued his reports on Thursday.
What he says is true, and totally meaningless at the same time. The primary business expense on Wall Street is people. Other companies are forced to spend a ton of money on steel, oil, food, and raw chemicals. But Wall Street (like law), the only real cost is getting the people in place.
Nocera goes on:
In his Citigroup memorandum, 14 of the 25 best-paid executives are going to make $5 million to $9 million. Compare that with General Motors, where they make, you know, automobiles. The chief executive will make a little more than $5 million. But only six others will make more than $1 million, and none will top $1.8 million. Most of the rest make mid-six-figure salaries.
Tell me again: what in the world does a Citi trader do that makes him worth so much more than a General Motors executive? Go figure.
Rather than end the discussion with “go figure,” let’s actually try to answer the question.
In finance, principal actors matter a lot more. The competence of JPMorgan’s (JPM) management and Morgan Stanley’s (MS) management has made a huge difference in the fate of those two organisations as compared to, say, the fate of Lehman Brothers and Citigroup (C), where management was significantly worse.
In the auto industry, Steve Rattner’s condemnation of Rick Wagoner aside, inertia matters a lot more than key leaders. The die has been cast for Detroit for years, owing to a combination of the industry’s insularity, the union, environmental regulations, trade rules, energy prices, American car-buying patterns, etc. You can blast Wagoner all you want, but we’ve yet to hear a plausible argument that if, five years ago, a different CEO had been in place, GM would be in a different position today. Even 10 years ago. So it just doesn’t make as much sense for the CEO (or other top management) to be paid as much in a company like that.
Beyond that, there’s specialisation. Whereas a successful finance chief needs to know the business inside and out, the best CEO in Detroit came from Beoing, which is a similar business, but not the same, and it means that the pool of candidates that could run a car company is less specialised and wider. Chrysler hired a former Home Depot CEO — that turned out horrible, but then, Chrysler was a pure basket case even before Cerberus made its horrible purchase.
The bottom line is that attacking bonuses is the wrong fight. For one thing, it’s arbitrary to say that bank shareholders should get more money than they currently are. We don’t hear any shareholder of Goldman Sachs (GS) complaning, now do we? But if you think people are paid too much, then the effort should not be about limiting pay, but about pushing for a much simpler Wall Street, where specialisation and willingness to take risk matters less. Accomplish that (very difficult), and the pay problem will go away.