Why are bank employees paid more than engineers?

[CaptainPanic]

I read in the newspaper the other day that at ING (a big Dutch bank), thousands of employees will get a bonus regardless of the facts that (1) the bank has received massive government support, and (2) they have suffered losses which were pretty significant imho. These bonuses are in total 950 million euro according to some sources. ING denies that it's this much, but admits that bonuses are given.

 

This made me a bit upset actually. Are these bankers really so arrogant? They just work at the bank, like any employee. The majority of the bankers didn't invest a penny in the company where they work.

 

I know what happens if you leave a kid and a cookie jar in one room and look the other way... but now the parents are in fact looking.

 

I wonder what would happen if engineers would really make an effort to show their importance. Engineers aren't paid these huge bonuses. Engineers are paid a lot less in fact.

 

What would happen if engineers would demand a similar reward for keeping the economy running? Would they deserve it? I think so... Think of what would happen if engineers stop working:

 

All kinds of processes would come to a halt, either because of a lack of operating (they break down) or out of safety (they are shut down). There would be less, or no electricity. Food would rapidly become scarce. Fuels would become limited very fast, and on the long term, pretty much everything would stop spinning except the earth itself...

 

Or, take doctors. They're not paid as much as these arrogant bankers either. I never heard of a doctor that became a multimillionaire, although there might be an exception. Think of what would happen if doctors stop working. How many lives would be lost?

 

Now think of what would happen if bankers stop working. That's right, this already happened since September 2008. They haven't done a lot of work since that moment. Banks stopped giving loans, and were nationalized.

 

Note that this is a completely subjective text, which might contain mistakes, and it is based on my opinion and not much else. If mods think it's a nice discussion, then please leave it. I note that it is hardly scientific.

[SH3RL0CK]

Well, you have to understand that bankers are far more important that engineers in our society. As are actors, athletes, and many other professions. Society can do without engineers and scientists, but without athletes it would not functions. Likewise, how could ING perform as well as it did unless the very top talent was hired and retained by appropriate pay. This is why the pay scale is the way it is.

 

[/end sarcasm]

[Sisyphus]

Well, the real answer to "why are X paid Y" questions is almost always just "supply and demand." It's a balance between what people are willing to pay for the labor and what people are willing to work for. As demand for that kind of labor increases, workers can charge more for their services. If supply increases, employers can offer less pay and still get all the talent they need. With bankers, it is perhaps a little bit different, if only because the people collecting the paychecks have much more informations and are a few steps removed from the people footing the bill, so they can more easily manipulate the system. The same overall principle still applies, though. With the bailouts, on the other hand, compensation seems to have become disconnected from the market entirely, and the answer as far as bankers is concerned is "because they can get away with it."

Edited March 9, 2009 by Sisyphus

[CaptainPanic]

Well, the real answer to "why are X paid Y" questions is almost always just "supply and demand."

This makes the comparison even more interesting. In almost all engineering fields, the supply will go down or has already gone down and demand has gone up. Europe is now importing technical people from all over the world. Does this mean that bankers must be homegrown while engineers can be import? How do they keep the demand so high, or the supply so low?

 

Please note that I have nothing to complain about... I'm not asking for more myself, I'm demanding that people who underachieve (like in banks) get less. After all, we're paying banks now to keep our money, while initially banks would even pay interest on the salary-accounts. Those days are over. And I would prefer to pay less since they also give less interest, and seem to screw up on a global scale.

[Sisyphus]

This makes the comparison even more interesting. In almost all engineering fields, the supply will go down or has already gone down and demand has gone up. Europe is now importing technical people from all over the world.

 

Well, if the market were limited to Europe, you'd probably be taking in more money. Unfortunately for you (but good overall for both Europe and the places being outsourced to) it isn't. Wages are increasingly determined by global supply and global demand. I work with a lot of Russian, Indian, and Middle Eastern engineers, myself, because their skills are more in demand here. The more globalization occurs, the more trade is made free, and the easier outsourcing becomes, the more global wages become equal for equal work. That means we in the richest countries will start having to work for less, but cheaper labor also means cheaper goods and services.

 

Does this mean that bankers must be homegrown while engineers can be import? How do they keep the demand so high, or the supply so low?

 

I don't know. Demand is high because everyone uses money. Businesses run on credit. Most individuals don't know much about finance, and are easy to basically take advantage of. Supply is low because... dunno. The bankers in question would probably say that there's a very elite talent pool. It's also stereotypically a very insular community (the best way to get a job on Wall Street is to meet the right people at Princeton), and from what I hear there's a lot of truth to that, which would explain the lack of "imports." And there's probably some institutional hindrances to competition, otherwise institutions with fairer hiring practices should theoretically be able to outcompete the good old boys, though I don't know enough to say what they are. And, finally, there are relatively few people who have the necessary natural talent pursuing it. If you're an engineer you probably have good math skills, but you didn't try to go into finance. Why not? There's your answer.

 

Please note that I have nothing to complain about... I'm not asking for more myself, I'm demanding that people who underachieve (like in banks) get less.

 

I don't think you're going to find much disagreement there. If they want to be paid like risk-takers, they should be taking actual risks.

 

After all, we're paying banks now to keep our money, while initially banks would even pay interest on the salary-accounts. Those days are over. And I would prefer to pay less since they also give less interest, and seem to screw up on a global scale.

 

I assume you're talking taxpayer supported bailouts and not direct fees. If you are literally personally a bank to keep your money, I'd suggest shopping around!

[Mokele]

I've actually always been curious about the assumption that salary is the product of supply and demand. Has there actually been any research to determine if this really is the case?

 

Are there *really* less bankers per job opening than engineers? Less CEO applicants? Given numbers that business schools pump out, I'm skeptical.

 

And how much is based on the labor market versus 'perception of value', where employees who may be no more rare or skilled or desirable, but are doing socially valued activities like managing/'leading' get more money?

 

I'm just skeptical that supply and demand is *really* the underlying factor.

[Sisyphus]

I've actually always been curious about the assumption that salary is the product of supply and demand. Has there actually been any research to determine if this really is the case?

 

Are there *really* less bankers per job opening than engineers? Less CEO applicants? Given numbers that business schools pump out, I'm skeptical.

 

And how much is based on the labor market versus 'perception of value', where employees who may be no more rare or skilled or desirable, but are doing socially valued activities like managing/'leading' get more money?

 

I'm just skeptical that supply and demand is *really* the underlying factor.

 

Well again, at least in theory, if it wasn't, it should be self-correcting. The companies that pay their CEOs reasonable salaries should be more profitable than the ones that pay them ridiculous amounts. I don't know whether this works in practice, but I don't see why it wouldn't.

 

What's left, then, is that it is supply and demand. Like with professional athletes, there are an abundance of people who want the jobs, but only very few who are the absolute best at it, and everybody wants those very few, since it make a huge difference in how much money they take in.

Edited March 9, 2009 by Sisyphus

[ecoli]

Another missing peice of the picture is that, because gov't IS intervening, banks know they can get away with the huge bonuses. They're just going to get more bailout money if they run out of money again (and again).

 

So while un-bailed out businesses must innovate or trim the fat to reduce costs, banks continue to waste money.

 

Just another argument against the stimulus.

[Sisyphus]

Another missing peice of the picture is that, because gov't IS intervening, banks know they can get away with the huge bonuses. They're just going to get more bailout money if they run out of money again (and again).

 

So while un-bailed out businesses must innovate or trim the fat to reduce costs, banks continue to waste money.

 

Just another argument against the stimulus.

 

But that could be greatly mitigated by salary caps for businesses receiving bailout money. Until they pay the money back, they get paid like humans. The incentive obviously isn't quite as strong as if they were simply allowed to self-destruct, but on the plus side the company still exists, and a lot of people stay employed and productive, and the management is highly motivated to give those big checks back.

[john5746]

Another missing peice of the picture is that, because gov't IS intervening, banks know they can get away with the huge bonuses. They're just going to get more bailout money if they run out of money again (and again).

 

So while un-bailed out businesses must innovate or trim the fat to reduce costs, banks continue to waste money.

 

Just another argument against the stimulus.

 

True and this is a decent system for general competition. But, with an epidemic like the current situation, its a bit like arguing against AIDS medicine, since this will only prolong the infected lives. Better to let them die quickly and get out of the way.

 

Some mistakes were made and we are in a mess. The efficient thing might be to let everything tank and do a cold reboot. That doesn't mean its the best path.

[Mokele]

Well again, at least in theory, if it wasn't, it should be self-correcting. The companies that pay their CEOs reasonable salaries should be more profitable than the ones that pay them ridiculous amounts. I don't know whether this works in practice, but I don't see why it wouldn't.

 

But if CEO-level people have come to *expect* obscene salaries, far beyond their own worth, then none will apply for a job with a reasonable salary, and you'll get stuck with the bottom of the barrel. How much does this cultural expectation influence or even coerce business?

 

Consider that in CEO salaries have gone from 24x average worker salary in 1965 to 300x in 2000. In the period from 1989 to 2000 alone, the average CEO salary went from 71x to 300x, over a 3-fold raise (even considering rising wages, which surely didn't rise over 3-fold).

 

Can the supply and demand for CEOs have changed enough in 11 years to justify an over 3-fold pay raise? I'm very skeptical of that. If not, where did that raise come from?

 

ike with professional athletes, there are an abundance of people who want the jobs, but only very few who are the absolute best at it, and everybody wants those very few, since it make a huge difference in how much money they take in.

 

I disagree - the skill difference at that level is almost insignificant. You're *WAY* on the tail of the statistical distribution. And if that was the case, why is it so quick and easy to get a replacement when someone retires or is injured?

 

Another missing peice of the picture is that, because gov't IS intervening, banks know they can get away with the huge bonuses. They're just going to get more bailout money if they run out of money again (and again).

 

These conditions long preceded the bailout.