Wall Street compensates its CEOs so well, one former executive walked off with $260 million despite crashing his company. Even Wall Street heavyweights have criticized the practice, which has helped widen the nation’s income inequality. According to a new study in Quarterly Journal of Economics, Wall Street’s generous pay began to skyrocket following deregulation.
The Glass Steagall Act, which separated commercial and investment banks, was gradually weakened in the late 1980s, until its full repeal in 1999. This changed organization and competition within finance, leading to the creation of mega-banks.
Deregulation coincided with Wall Street’s ever-increasing pay. By 2005, Wall Street earned 250 percent more than other industry executives (that ratio reaches 300 percent in the Tri-State area). “In other words, pay in the finance industry has become significantly higher, but also riskier and more backloaded.” But that could change when Dodd-Frank reforms go into effect:
Changes in financial regulation are an important determinant of all these patterns. The ultimate test of this hypothesis may be the evolution of wages in the next 5–10 years. If new regulations (Basel 3, the Dodd–Frank Act, etc.) are effectively implemented and if we are correct, then we expect both wages and skill intensity to converge and excess wages to disappear.
The study also shows the growing gap in pay for top finance executives and top regulators. Between 1980 and 2005, the ratio grew from 10 times to more than 60. The researchers write, “Given the wage premium that we document, it was impossible for regulators to attract and retain highly skilled financial workers because they could not compete with private sector wages.” (HT: Business Insider)