Why has pay risen so high in the financial sector?

Today  one of the staff at the Clover lunch truck was telling me about the upcoming protest at Dewey Square in front of the Boston Federal Reserve.

I think the financial protests can do a lot of good, but I really hope everyone can focus the message.  There are some very easy pickings that could get mainstream support.

Such as the fact that economic growth has flattened while financial compensation has risen.  I don’t see how anyone can look at this chart and not be troubled, not only morally but because it shows that something is historically wrong with our economy.

The chart is from David Frum who says “From 1945 until 1980, people in finance did not significantly outearn on average people in other sectors. After 1980, nonfinancial pay flattened, while financial pay accelerated. By 2008, the average employee in finance was earning double the average employee in non-finance.”

There’s a great quote from Naseem Taleeb about why the industry doesn’t self-regulate:

“But the puzzle represents an even bigger elephant. Why does any investment manager buy the stocks of banks that pay out very large portions of their earnings to their employees?

The promise of replicating past returns cannot be the reason, given the inadequacy of those returns. In fact, filtering out stocks in accordance with payouts would have lowered the draw-downs on investment in the financial sector by well over half over the past 20 years, with no loss in returns.

Why do portfolio and pension-fund managers hope to receive impunity from their investors?”

But obviously the self-regulation isn’t occurring, which indicates that both government and popular protest have a role to play in fixing this.

Leave a Reply

Your email address will not be published. Required fields are marked *