Bankers Are Kind of Like Athletes. So What?

Bankers like to compare their high salaries to professional athletes. This is because many of the people who'd like to make effigies of millionaire bankers also own jerseys of their favorite, even richer athletes. Watch out, cognitive dissonance! Don't you people understand, Goldman Sachs tells us, we're just like baseball players. If you don't pay us, we'll leave. James Kwak tries to debunk this line of argument.

He concludes that

yes, bankers are like athletes. Their individual contributions are overrated relative to their supporting environments; they are overpaid; they are paid based on where they randomly fall in the probability distribution in a given year; and paying a lot for bankers is no guarantee that your bank will be successful in the future. Team sports, like banking, are an industry where the employees capture a large proportion of the revenues. And one with negative externalities, like upsurges in domestic violence around major sporting events. Neither one should be a model for our economy.

I somehow agree with everything Kwak says, and am also weirdly unconvinced by his argument. Bankers and athletes are paid a lot, and possibly too much. But, so what? If Kwak is trying to suggest that pay doesn't dramatically effect performance in the aggregate, he picked the wrong sport with baseball. In 2008, five of the eight teams that made the playoffs were among the top 10 in highest payroll. Two more in the top five -- the Yankees and Mets -- both barely missed because of an untypically dismal start and finish to the season, respectively. The Yankees make the playoffs just about every year. So do the Red Sox and the Angels. Those are three of the top six payrolls.

Kwak doesn't refute the main point by the Goldman director: If you don't pay Goldman Sachs employees what they think they're worth (or what they can get from another bank), they will leave. That's just an indisputable fact.

Now we can have a debate about whether we want our current bankers to be incented to go into other jobs by limiting their total compensation pool, which will cut their salary and send more of them looking for jobs in other industries. The let's-make-banking-boring-again crowd might like this idea. Volker might like this idea. Kwak might like this idea. I might like this idea. You could do this with an industry-specific tax, which would seem kind of draconian. Or you could try to shrink the compensation pool with capital requirements and leverage ratios. But I guess I don't understand the value of comparing and contrasting athlete and banker salaries and incentives.