Bankers like to compare their high salaries to professional athletes. This is because many of the people who’d like to make effigies of millionaire bankers also own jerseys of their favorite, even richer athletes. Watch out, cognitive dissonance! Don’t you people understand, Goldman Sachs tells us, we’re just like baseball players. If you don’t pay us, we’ll leave. James Kwak tries to debunk this line of argument.
He concludes that
yes, bankers are like athletes. Their individual contributions are
overrated relative to their supporting environments; they are overpaid;
they are paid based on where they randomly fall in the probability
distribution in a given year; and paying a lot for bankers is no
guarantee that your bank will be successful in the future. Team sports,
like banking, are an industry where the employees capture a large
proportion of the revenues. And one with negative externalities, like
upsurges in domestic violence around major sporting events. Neither one
should be a model for our economy.
I somehow agree with everything Kwak says, and am also weirdly
unconvinced by his argument. Bankers and athletes are paid a lot, and
possibly too much. But, so what? If Kwak is trying to suggest that pay
doesn’t dramatically effect
performance in the aggregate, he picked the wrong sport with baseball.
In 2008, five of the eight teams that made the playoffs were among the
top 10 in highest payroll. Two more in the top five — the Yankees and
Mets — both barely missed because of an untypically dismal start and
finish to the season, respectively. The Yankees make the playoffs just
about every year. So do the Red Sox and the Angels. Those are three of
the top six payrolls.
Kwak doesn’t refute the main point by the Goldman director: If you
don’t pay Goldman Sachs employees what they think they’re worth (or
what they can get from another bank), they will leave. That’s just an
indisputable fact.
Now we can have a debate about whether we
want
our current bankers to be incented to go into other jobs by limiting
their total compensation pool, which will cut their salary and send
more of them looking for jobs in other industries.
The let’s-make-banking-boring-again crowd might like this idea. Volker
might like this idea. Kwak might like this idea. I might like this idea.
You could do this with an industry-specific tax, which would seem kind
of draconian. Or you could try to shrink the compensation pool with
capital requirements and leverage ratios. But I guess I don’t understand the value of comparing and contrasting athlete and banker salaries and incentives.
