Thursday, January 12, 2012

Labour Bargaining Power: Its Different At The Top

Last month I highlighted a working paper on calculating the optimal tax rate, especially with reference to top income earners.

One of the channels identified by the authors in which top income earners have increased their share of the income pie over the past few decades is through their stronger wage bargaining power – when marginal tax rates are low, it pays for CEOs and senior managers to supress income gains in lower pay grades. This maximises “shareholder value” by boosting profits, and earns them nice bonuses for being “aligned with shareholders’ interests”.

And here we can see this channel in action (excerpt):

Wall Street Said to Weigh Freezing Pay Bumps for Junior Bankers

Jan. 10 (Bloomberg) -- Wall Street’s biggest firms, facing a slump in investment-banking revenue, are considering freezing compensation levels for some junior bankers, according to people familiar with the deliberations.

Credit Suisse Group AG is likely to suspend its practice, an industry norm, of boosting pay automatically each year for analysts, associates and vice presidents within the investment- banking division, a person with direct knowledge of the decision said. While those employees will get their regular annual salary increases, bonuses probably will be lowered to keep total pay flat from a year earlier, said the person, who requested anonymity because the plan isn’t public.

Goldman Sachs Group Inc. and JPMorgan Chase & Co. are being watched by competitors for signs the companies are planning similar moves, said people at four other firms. Cutting pay can be perilous if your rivals don’t because it’s easier for junior bankers to defect, draining a future generation of talent. Wall Street firms may make the change en masse only if one or more of their biggest rivals act first, the people said…

...Base pay for junior bankers typically increases automatically by about 15 percent to 20 percent, akin to a unionized salary scale, as they work a year and move up a so- called class. Younger bankers, who typically comprise about 75 percent of the investment-banking workforce of the biggest Wall Street firms, often start with a $200,000 annual salary and can expect $240,000 or $250,000 in the second year, said two senior bankers…

…A banker typically spends three to four years as an associate and then three years as a vice president before he can be named director. Top-producing vice presidents in their third year, sometimes called a VP-3, could get $600,000 to $700,000 in total compensation, said a senior Wall Street banker.

At Deutsche Bank AG, senior executives are evaluating whether to cut or freeze pay for the top tier of vice presidents as a way to pare all junior-banker pay, said a person familiar with the matter...

...The review of junior-banker pay focuses on investment- banking divisions and not lower-level employees in equity or fixed-income trading departments, the people said.

Associate compensation continued to rise in the wake of the financial crisis, the executives said. Starting pay for each position also increased, so a first-year associate job that paid $200,000 a year rose to $210,000 for the next person to fill the slot. With compensation pools down this year at almost all Wall Street banks, climbing associate pay has caused a squeeze on pay for senior managers, said a banker involved in such decisions.

Never mind that we’re talking about demonised Wall Street bankers, or the enormous compensation they get relative to just about everybody else. In any social structure, it’s relative status and power that matters. In this case, we’re seeing top executive pay inside Wall Street threatened by lower revenues; and their response, for which they’ll probably earn market plaudits, is to supress pay lower down the scale.

Generalising from the argument in the paper I linked to above, this behaviour would be less likely if tax rates were much higher – or if compensation was more equal across the hierarchy. Or, dare I say it, in society as a whole.


  1. "...this behaviour would be less likely if tax rates were much higher – or if compensation was more equal across the hierarchy. Or, dare I say it, in society as a whole..."