Two recent pieces in the Wall Street Journal add credence to the dangers of government interference with compensation arrangements. In today’s edition, there’s an article highlighting the departure of key investment bankers from their firms. Many are joining boutique firms to avoid the public scrutiny of their compensation arrangements that has come with government involvement. This is a slow death for these firms — those rainmakers who do have career alternatives are usually the strongest performers.
The politicization of Wall Street paychecks is impacting the ability to fix this mess as well. In a February 24 op-ed, William Isaac, the former head of the FDIC who took over Continental Illinois, notes that one of the reasons nationalization is not a viable strategy today is because pay restrictions complicate the manpower issue, “We had significant difficulties attracting quality people to Continental even without today’s limits on compensation.”
Demonizing Wall Street’s high earners may make for great headlines, but at the end of the day, it will make for a poor return on our taxpayer investment in these financial institutions. There are other areas where we accept that top performers can make good money even when their organizations are suffering: high-paid actors in flop movies (Warren Beatty and Dustin Hoffman in Ishtar each earned $5.5 million), star athletes on mediocre teams (Vince Carter of the NJ Nets earned $18 million in 2007). Surely it is no more ridiculous to pay star investment bankers who help raise capital and provide strategic advice for the nation’s businesses. The worst outcome would be to see these businesses bled to death by an exodus of money-making talent.
It’s an ugly truth that we’ve needed taxpayer involvement in the financial institutions. No matter the necessity, just like fish and visiting in-laws, this situation does not age well.