The CEO of M&T Bank Corporation, Robert Wilmers, has discussed the compensation system in the financial services industry in general, especially to the banking holding sector and to the trading oriented system, which is one of the main major causes of disruption in the financial system.
As for the compensation system in the financial services industry in 1929, in the wake of the most devastating financial crisis in U.S. history, the compensation for employees was only 1.5 times of the average non-farm workers. By the 1940s, the ratio was around 1.0 to 1.2, and stable until 1980. By 2009, the ratio rose to 3.4 times for employees in securities and investment sectors. And the average 2009 compensation for investment banking at four out of six banks was at least six times. However, for credit intermediaries sector including commercial banks like M&T, the ratio stayed at 1.2 times.
In 1989, “chief executives at these top bank holding companies earned $2.8 million on average or 49 times that earned by a Harvard Business School graduate ($57,000) and 97 times the U.S. median household income ($28,906). By 2007, those ratios had changed dramatically. The top six bank holding company CEOs were earning an average of $26 million, or 192 times the starting Harvard Business School compensation ($135,000) and fully 516 times the U.S. median household income ($50,233).”
Back in 1969, compensation for the CEOs of top bank holding companies and the Fortune 500 non-bank CEOs was quite close to $270,000 for bank executives and $276,000 for the latter group. Then the gap increasingly widened over years. Now the top bank holding company CEOs are paid as 2.3 times as much of the average CEO of a Fortune 500 non-bank company.
He raised the question for paying very high for CEOs of bank holding companies — whether the executives of financial services firms earn more than those in the commercial economy, through efficient capital allocation? We, using common sense, expect that the management of firms that produce goods and services would have greater value for the economy, and because of that, the CEOs of those firms would logically be compensated more than bank executives.
Wilmers also noted that this is not the suggestion that the remuneration to those who trade should be capped. There seems to be opportunity for personal financial gain, specifically in unregulated industries which do not have government support, such as hedge funds. They have the 25 highest paid executives, of $25.3 billion collectively, or $1 billion per person in 2009. He mentioned we should not be concerned when successful business leaders are well compensated. “But to take activities that are purely capitalistic endeavors and bring them into a regulated environment under the umbrella of insured protections is simply not prudent. Would it not be better to let those engaged in such activities live and die by the pursuit of their fortunes rather than impose a burden on the whole economy.”
Because of the high pay, this industry has lured the talent away from those crucial fields for social and economic growth such as science, medicine and engineering. The compensation for financial services versus other sectors has enlarged from a generation ago. Thirty years before, engineering graduates were paid 15 to 25% more than financial professionals. By 2005, professionals in finance with advanced degrees are paid 30-40% higher than engineers. Twenty-five percent of new graduates from MIT and Caltech were looking for jobs in financial sectors during 2004-2009. When the top human resources of engineering and scientific are drawn to capital markets, it might lead to having breakthrough innovations.
As for the compensation system in the financial services industry in 1929, in the wake of the most devastating financial crisis in U.S. history, the compensation for employees was only 1.5 times of the average non-farm workers. By the 1940s, the ratio was around 1.0 to 1.2, and stable until 1980. By 2009, the ratio rose to 3.4 times for employees in securities and investment sectors. And the average 2009 compensation for investment banking at four out of six banks was at least six times. However, for credit intermediaries sector including commercial banks like M&T, the ratio stayed at 1.2 times.
In 1989, “chief executives at these top bank holding companies earned $2.8 million on average or 49 times that earned by a Harvard Business School graduate ($57,000) and 97 times the U.S. median household income ($28,906). By 2007, those ratios had changed dramatically. The top six bank holding company CEOs were earning an average of $26 million, or 192 times the starting Harvard Business School compensation ($135,000) and fully 516 times the U.S. median household income ($50,233).”
Back in 1969, compensation for the CEOs of top bank holding companies and the Fortune 500 non-bank CEOs was quite close to $270,000 for bank executives and $276,000 for the latter group. Then the gap increasingly widened over years. Now the top bank holding company CEOs are paid as 2.3 times as much of the average CEO of a Fortune 500 non-bank company.
He raised the question for paying very high for CEOs of bank holding companies — whether the executives of financial services firms earn more than those in the commercial economy, through efficient capital allocation? We, using common sense, expect that the management of firms that produce goods and services would have greater value for the economy, and because of that, the CEOs of those firms would logically be compensated more than bank executives.
Wilmers also noted that this is not the suggestion that the remuneration to those who trade should be capped. There seems to be opportunity for personal financial gain, specifically in unregulated industries which do not have government support, such as hedge funds. They have the 25 highest paid executives, of $25.3 billion collectively, or $1 billion per person in 2009. He mentioned we should not be concerned when successful business leaders are well compensated. “But to take activities that are purely capitalistic endeavors and bring them into a regulated environment under the umbrella of insured protections is simply not prudent. Would it not be better to let those engaged in such activities live and die by the pursuit of their fortunes rather than impose a burden on the whole economy.”
Because of the high pay, this industry has lured the talent away from those crucial fields for social and economic growth such as science, medicine and engineering. The compensation for financial services versus other sectors has enlarged from a generation ago. Thirty years before, engineering graduates were paid 15 to 25% more than financial professionals. By 2005, professionals in finance with advanced degrees are paid 30-40% higher than engineers. Twenty-five percent of new graduates from MIT and Caltech were looking for jobs in financial sectors during 2004-2009. When the top human resources of engineering and scientific are drawn to capital markets, it might lead to having breakthrough innovations.
