Tuesday, April 28, 2009

Why Wall St Salaries Are Still High

Alternative job opportunities, including entrepreneurship, determine pay scales. It is a bidding contest where the best and highest value use of the intelligence, motivation, education, risk taking and other employment related characteristics of employees determine their salaries. A business is a salary price taker and not a price setter. Wall St. and other businesses that pay high salaries, such as law firms, for talent can only adjust their business models, to the extent allowed by competition, to see if they can afford the going rate for the talent they want to hire. High salaries, like capital investment, are also barriers to entry for new competition and offer a competitive advantage to firms that can afford to pay them.

The fact that there were losses or that results did not justify the pay scales after the fact is irrelevant. The competitive market salary requirement at the beginning of the process for the type of individual employee characteristics desired is what is relevant.

Suppose several horse owners have potentially winning racehorses in the same big purse race, should not each owner hire the best jockey he can afford. Obviously, after the race, the hiring of only one jockey made sense. It is irrational to say after the race that the other, losing owners paid too much for their jockeys and that they should have saved money and used lower paid, average performing jockeys.

The same logic is true for evaluating innovation. Suppose the government or industry believes that a cure can be found for a devastating disease at a reasonable but high research cost. If the research is funded and undertaken, but after a sufficient time no cure or other innovations are found, the original funding was still appropriate. It is the expectations at the beginning of the research process that determines if the funding is appropriate for innovation.

In addition to the competitive advantage, Wall St. needs self-sufficient, confident, intelligent, risk taking, business loving employees to succeed. These types of employees have many career options, including international employment, entrepreneurship, and successful business careers. They also have many education choices and can be doctors, top law firm attorneys, etc. The fact that there were financial industry losses and bad past investments and products does not change Wall St's future need for these types of people.

To be against Wall St salaries is the same as saying that market determined salaries are irrelevant. It is the same as saying that job and employee characteristics are unimportant and that everyone should get the same salary, which can be whatever the government wants including minimum wage.

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