Sunday, September 6, 2009

Socialism at work: G20

A key issue of the G20 summit is curbing banker pay.

Banking is a job which very few people are good at, there are massive differences in productivity between the good and the bad, and it's not always clear who will be good and who will be bad moving forward - which lends itself to the "keeping up with the Joneses" effect of bad bankers being overpaid.

I don't think these bad bankers deserve the money they're getting... but regulating a bank's ability to pay its employees is a VERY dangerous thing to do for two reasons. Firstly, it throws out the good with the bad, so good bankers can't be paid (which doesn't seem fair). Secondly and more importantly, a major reason for this recession was that people at banks didn't know what they were doing. Making it less attractive for good bankers to stay in the industry raises the risk that this happens again.

Another classic example of where an unfair situation (inflated banker pay) shouldn't be addressed by government, who can only make it worse.

One interesting alternative that I haven't thought through much but could be promising - if you're going to limit banker pay anyway, it may be better to limit the company to paying its workers an AVERAGE of some number, but leave the individual allocation up to the bank. For every employee, a bank may be able to give out a maximum of an additional $X, without specifying the max any individual can get. A great banker will get paid but everyone else doesn't get inflated. It's the bank version of the NFL salary cap.

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