Why are bankers' salaries so high?
W&D dined with a delightful client during the week. The client opined as to why bankers (i.e. investment bankers, etc) earn much more than people of similar qualification/ experience levels.
In the interest of science, W&D has done the research. And, as it were, contra Ms Gillard, the science is not settled. However, there are a number of themes.
W&D should disclose, as if he were a parliamentarian disclosing financial interests (but before being found out), that he was once a 'merchant banker' - the forerunner to today's investment banker. But pleads that this was the early and mid 1980s, before the financial-compensation regime exploded.
And, in any case, W&D worked hard for the money...
But, back to the issue. As the research of Philippon and Reshef* showed, and can been seen from the chart, the compensation of US financial executives, broadly defined, leapt in the mid 1980s and then raced away from other sectors after 1990.
This extra-ordinary divergence, called the 'financial premium', was, and is, largely driven by excessive compensation at the top of companies**.
At the top of a Wall Street investment bank, base compensation is, sort of modest, about $350,000 p.a. Of course, the cream is in the bonuses, which in a good year comfortably exceed $2m. Plus.
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*The Quarterly Journal of Economics Vol 127, Issue 4, Pp 1551-1609.
** This has been confirmed in a number of other studies. See, for example, Ken-Hou Lin, The Financial Premium in the US Labor Market: A Distributional Analysis, Social Forces, Vol 94, Issue 1, Pp 1-30.
# Source: Dealogic.