Why Wall Street CEOs Get Paid So Much

Robert Reich thinks that Wall Street CEOs get paid more than their Main Street counterparts because they're liars:

There’s no reason to believe Wall Street executives have been smarter than executives in the real, non-financial economy. They’ve been paid more because they’ve been smarter at creating schemes that have only appeared to create value, while keeping investors in the dark.

The first part is probably true: while Wall Street CEOs are generally pretty smart, Main Street CEOs are pretty smart too. Not that pay should really be correlated to intelligence anyway: a lot of very clever people have proven themselves excellent at destroying billions of dollars in value over the years.

And the second part certainly has a large element of truth to it as well. The profits for which Stan O'Neal got paid $46 million last year were not the kind of profits any shareholder would, in hindsight, have wanted.

But none of this really explains the enormity of Wall Street pay packages. After all, there are many non-financial firms which made just as much money last year as Merrill Lynch, and precious few of them paid their CEOs $46 million.

I think that one of the big reasons why Wall Street CEOs make so much money is that they actually make much less money than their non-financial counterparts if their take-home pay is expressed as a mulitple of the firm's average salary. On Wall Street, everybody is very highly paid, not just the CEOs. And in most firms there's a star trader or two who actually makes more money than the CEO in any given year.

On Wall Street the measure of success is the size of your pay package, much more than it is on Main Street – which helps to explain those Brobingnagian checks at the end of each year.

And then there's the fact that ultimately the bank's revenue has to go somewhere – and if it doesn't go to the employees, it will go to the shareholders. But shareholders just aren't as important on Wall Street as they are elsewhere. Up until pretty recently, the likes of Goldman Sachs and Lazard Freres and Blackstone were all privately held; there are still pretty large banks, like Rothschild, which see no reason to go public and do very well for themselves. And if the banks don't really need their sharholders, those shareholders don't have too much ability to push for a bigger slice of the pie for themselves.