It's not about whether the banks pay too much, but rather a question of whether the rest of corporate America pays to little.
The young money is about to get more of it. That’s unlikely to make the Occupy Wall Street crowd happy. But maybe it should.
Goldman Sachs GS , Bank of America BAC and JPMorgan Chase JPM have announced or are reportedly set to give as much as a 20% raise to their junior bankers. The latest round of announcements came this week after Morgan Stanley MS kicked off the pay war for junior employees a few weeks ago. That means 22-year-old Wall Streeters, who only used to make $120,000, will now be justly compensated. Ahmen.
In a good year, those same 22-year-olds may now make as much as $175,000, according to Wall Street compensation firm Johnson Associates.
Oddly enough, the current round of pay raises seems to have been sparked by cries that Wall Street’s youngins were being mistreated. Earlier this year, Kevin Roose, a journalist at New York magazine, wrote a book about how miserable life is for Wall Street junior employees. (Read Fortune‘s review of Roose’s Young Money.) Spoiler alert: all of the bankers in Roose’s book chose to flee Wall Street. Their bucks full of money didn’t have room for their tears as well, I guess.
And perhaps that’s good for the rest of us. Smart, talented people should do a variety of things, not just what pays them most. But here’s the thing: Wall Street firms, just a few months later, are reacting. Say what you will about Wall Street, but its willingness to share profits with employees is much better than the rest of corporate America.
Nickel and Dimed, the famous book by Barbara Ehrenreich about poor pay and work conditions across the country, came out over a decade ago. How did corporate America respond? It didn’t. Wages have stagnated for the past decade. And Washington has only voted to raise the minimum wage once — in 2009.
Sure, Wall Streeters work a lot of hours. But the average American worker isn’t living a cushy life. Starbucks, responding to an article in The New York Times about workers’ hours, recently said it would no longer force workers to do so called “clopening” shifts, when they have to work back-to-back shifts that end at 11 PM and start at 5AM. But it’s still going on elsewhere.
Wall Street has a pay culture where most of the profits of the firms go to the employees. The reason is a bit historical. Wall Street firms were partnerships, and partnerships by definition tend to pay out all of their profits to their workers. Also, finance firms tend to be low-capital businesses, so they can invest much of their profits in their workers. But the pay practices on Wall Street have generally continued even after the firms have gone public, and as the firms have grown and added bank branches and things that do require some capital.
There’s no reason Wall Street’s pay practices couldn’t be exported elsewhere. Wal-Mart, for instance, generally runs a low capital business as well, yet it has long paid its workers much less than it could afford to. Wal-Mart WMT could learn a lot from Goldman.
Here’s the explanation in finance speak: Companies should generate enough profits to justify the price that shareholders are willing to pay for its shares. Once shareholders are no longer willing to pay up for those profits, they should invest that money elsewhere.
Wall Street firms get this. A few years ago, shareholders of Wall Street stocks traded for high valuations. Investors are no longer willing to pay up. So banks are shifting more of their capital to workers. And yes that will make it easier for them to recruit and keep workers and hopefully make them happier and more productive. That makes sense.
Likewise, Wal-Mart’s shares have faltered over the past few years. The retailer, however, continues to generate returns that are much higher than shareholders are willing to pay for. Yet, there have been no announcements of large pay raises for Walmart employees.
I have argued that Wal-Mart could increase its salaries without hurting its stock price. Shares of Goldman have not dropped on the news that it will pay thousands of employees tens of thousands of dollars more. Neither have any of the other banks.
At a time of growing concern that income inequality is doing serious damage to America — it is at least a part of what’s fueling the anger in Ferguson — there are reasons to be weary of the news that Wall Street is paying its junior banks around three times the salary of the average worker in America. But only part of the problem, and perhaps smaller than we think, that Wall Street pays too much. It’s the rest of corporate America that continues to pay too little.