Explaining Southern California's economy

Wall Street pays bankers more to keep them from being unemployed

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Andrew Ross Sorkin has a good column today on banker pay, which has declined as the fortunes of big Wall Street investment banks have turned south. However, he insists that we look to a more opaque metric: the compensation-to-revenue ratio.

For publicly traded banks, increased profits from rising revenue is supposed to be returned to shareholders. But as Sorkin notes, there's a battle between shareholders and employees for the pieces of that pie. When the revenue-to-compensation ratio is out of whack — well above 50 percent, for example — it indicates that employees are winning. 

This becomes especially apparent when the economy is in a bearish mood and revenues are lower. The conventional wisdom says that this is no time to cut compensation at banks. Sorkin expresses some mild skepticism at this notion:

Bank executives have long said that they must pay a larger slice of a shrinking pie in bad times to retain their top people. In a bad environment for the entire industry, it remains unclear exactly where all these people would go.

Firms say that their greatest assets are not factories, equipment or intellectual property but the people who ride their elevators everyday. And in fairness, when revenue jumps at Wall Street firms, compensation has not always kept up.

Basically, compensation that outweighs the bank's overall performance is a form of corporate welfare — financier socialism, if you will. It's probably true that the very highest fliers could strike out for greener board rooms and trading floors if their compensation were cut. But for the majority of Wall Streeters, Sorkin is right: Where ya gonna go?

Nowhere, obviously. You just rely on the brass to fall back on the conventional compensation wisdom, using more of the revenue to sustain the head count.

It isn't pretty. But at least it keeps the millionaires and budding millionaires off the unemployment line.

Follow Matthew DeBord and the DeBord Report on Twitter.

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