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:

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