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August 03, 2010


Luis Enrique

that paper looks great.

Isn't it important to understand first why banks were able to make such gigantic revenues (gross profits), with the question of how they then divvy up the spoils being some what secondary? After all, if they had less money to play with in the first place, assuming the wage of normal workers in the finance sector are relatively fixed, they'd have to pay their superstars much less.

Can anybody recommend anything on the subject of why banks became so titanically profitable?

I wonder what the spillovers are into the wider economy - did, oh I don't know, advertising executives or local government CEOs get paid more because bankers somehow shifted up the top-tier going rate?

Luis Enrique

do you have any particular idea why this ideology emerged and became operational when it did?

I don't imagine that bankers in 1980 where any less enamored with their own abilities or shy about grabbing what they could (I'm always being told that typified the 80s) and I'm not aware of any legislative or similar changes that suddenly unleashed them. It cannot be a UK centric explanation.

Michael St George

Luis, I suspect you would find a similar trend in the total remuneration of local government CEOs over the same period, but I doubt whether that would have been due to what you call the spillover effect.

If such an effect had been at work, wouldn't that imply that the labour market for local government CEOs saw them as potential substitutes for high-performing bankers who therefore justified a higher price for their labour to prevent them from defecting to the banking sector? Viscerally, that doesn't seem totally feasible.

As an ex-banker, it always intrigues me that analyses such as that of Bell and van Reenen are skewed towards the financial services sector. Surely the same effects (and especially the Rosen-superstar and alpha-deception phenomena) are equally at work in, say, the salaries of Premiership footballers. Yet the massive inequalities there are hardly ever commented on.

Luis Enrique


you're right - direct labour market competition probably isn't happening. I had in mind a less formal sense of what's 'normal' for a top job, the expectations of both employers and employees.

Luis Enrique

An alternative explanation is that it has nothing to do with superstar economics nor ideology, but rather that some time in the 1990s something turned on the money taps, and the bankers found themselves rolling in the stuff. Then those with the power to write their own cheques and those in strong bargaining positions grabbed all of the surplus.

Paolo Siciliani

I recall an old article by Krugman (http://www.pkarchive.org/economy/ForRicher.html) dismissing the "superstar" hypothesis, but advancing the idea that salary inequality is due to permissive social norms, the fact that during the last decades people where simply no longer outrage by top salaries both in absolute and relative terms.

That does certainly have a role in all of this, but there must be something in the way labour markets work, in the sense that top earners manage to put themselves in the enviable position of residual claimants for the company's value added, regardless of their star potential and regardless of the principle-agent incentive constraints that were advanced by the economic profession to justify that practice.

This is about the sort of bargaining than must be going on in a de-unionised environment that have the vast majority of employees squeeze out in favour of those at the top – and this is also the case with highly skilled employees, which would do without the other main theory advanced to explain the inequality, the so-called ''skill-biased technological change'.
This leaves us with the remaining explanation, the "globalisation" hypothesis, which is certainly useful but not enough to explain how top-ranks became residual claimant, in particular in those non-tradable sectors, although increasingly less so.

In a nutshell, it is time we take a look in that black-box that is the firm, with its HR policies and recruitment practices, in a labour market where high-skilled staff negotiate individually and with an information disadvantage for those at the bottom of the rank.

phil jones

Finally tracked down this again on the wayback machine. Further interesting stuff on the consequences of taking superstars too seriously.


Luis Enrique


that's the perfect article for this topic. thanks v much for link.

Paolo Siciliani

Agree, excellent piece.

That system (rank and yank) is set up to create and exploit a wedge between insiders and outsiders, where to become an insider the best skill prized is conformity (of thoughts) with your superiors, which induce a culture of herd behaviour - which might ultimately prove detrimental to the long-term performance of the firm.

But I'm less interested into this business administration angle, than in the observation that this peculiar HR-led system is predominant, that there is conformity across the board, as one would argue that rejecting a system like yank-and-rank should constitute a comparative advantage in the labour market for employees that despise this "war for talent" bullshit, which I'd argue tend to perform better than "talents".

The point is why there is no more diversity, how could it be promoted and evolutionary selection fostered, where this inferior system is superseded by something that promotes equality of treatment and collaboration as its distinctive features.

This is the industrial organisation angle that I think has more remedial potential.

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