There is increasingly reason to believe that the outrageous pay on Wall Street may have peaked, just as it had before the Great Depression. (Note the similarity.) As was mentioned in another Times article today, Wall Street has not quite figured out there is a new share holder involved in the business these days. Now that the US government is involved due to irresponsible business practices, the government has every right to make such demands. Clearly Wall Street drove up comp plans, but will they now lead the way back down to reality?
But with tighter regulations on risk-taking and greater public scrutiny, the pay for top bankers could fall into line with pay for other professions, like doctors and lawyers.
Indeed, high pay on Wall Street is an episodic phenomenon. A recent paper by two economists studied pay in finance from 1909 to 2006, comparing the industry’s pay levels with the private sector as a whole, seeking to adjust for education, skills, age and gender of the workers.
In their National Bureau of Economic Research working paper, Thomas Philippon of New York University and Ariell Reshef of the University of Virginia found that the difference in pay between finance and the rest of industry was slight, if any, except in the late 1920s to 1930 and then again from the mid-1990s to 2006. In those boom years, compensation in finance was 30 percent to 50 percent higher than in the rest of industry.
The Wall Street pay differential with the rest of the economy, Mr. Philippon said on Wednesday, is falling and destined to erode further. “It will go back to something more normal,” he said. “The only reasonable number is zero or very close to zero.”
In executive pay, Wall Street set the tone for other industries, as the compensation of senior managers rose far faster than for most workers. In 2007, the total compensation of chief executives in large American corporations was 275 times that of the salary of the average worker, estimates the Economic Policy Institute in Washington. In the late 1970s, chief executive pay was 35 times that of the average American worker.
