Pigs at the Trough

Some thoughts about executive pay; and in particular about banker pay. Landon Thomas had a nicely written piece in yesterday's NYT wherein he related a telling response from Robert Diamond, Barclays’ head, as to why he was paid so much ($22 million in 2008!). Three reasons: first, I’m senior; second, I did deals that “transformed” the bank; and third, I am entitled to benefit together with everyone else from the financial system.

Which leads me to the following thought experiment. Why is it, exactly, that bankers can be worth so much? They don’t invent the wheel, after all; they lend money or, perhaps more typically in the world of high finance, they promise to pay over money under certain conditions which may or may not occur. So why are the individuals so valuable? Well, it could be that they have secret knowledge of proprietary “products” or methods or inside information that the rest of the market doesn’t have and that customers are paying enormously for. But does that seem very likely?

Isn’t the real reason they get paid because of their “relationships”? But think about that for just a second. What is a relationship, after all? Isn’t it an arrangement of mutual benefit? So if a CEO wants to deal with a banker (or institution), and we all know he has practically equivalent choices at many banks, what is the mutual benefit? Perhaps we should be looking for the quid pro quo that is virtually certainly there. Remember that CEO’s don’t cut the mustard unless they are “trusted” by Wall Street. And how, exactly do they earn that trust? Not by sticking their finger in the eye of bankers, that’s for sure. Doesn’t it look a bit like a mutual payola deal, where overpaid bankers assure the hiring of overpaid executives, and vice versa. Could that be what they really mean when they champion the so called free market?

I have no problem with executives getting paid very well for creating long term value. But anybody who does a deal and then claims a bonus is just a glorified pirate, as it will be years and years before the true success or failure of any deal becomes apparent, and as those in the business can tell you it requires the efforts of many people over many years to achieve that success.