The "scarce talent" con

The standard argument for CEOs’ high pay, especially in banking, is that it reflects the scarcity of managerial talent. Robert Peston says: “the knowledge and talents required of someone running a bank as huge and complicated as RBS are not possessed by many.” And Dan Davies tweeted that there are less than a dozen people worldwide who know to sell off toxic assets.

The simple laws of supply and demand thus require that bosses be highly paid, don’t they?

Not necessarily.

Let’s concede that the premise is right - that there are very few people able to run such complex organizations. This just raises the question: who made banks so complex in the first place?

The answer is: bosses themselves (collectively). Bosses who  argue that the complexity of banks means that management talent is scarce and must be highly rewarded are like the boy who murders his parents and asks for leniency on the grounds that he’s an orphan. They are confusing cause and effect.

Bank bosses have played a trick which countless ordinary workers do. The IT support guy who introduces lots of “security features” to his firm’s IT systems, or the secretary who has an incomprehensible filing system, make themselves indispensable by inconveniencing others.

In the old days of banking’s 3-5-4 model (borrow at 3%, lend at 5%, be on the golf course at 4 o’clock) bank bosses were well paid but not astronomically so. It’s management’s own introduction of complexity that has enabled their pay to soar. And whether this complexity is a social good or not is, to say the least, debateable.

Supply and demand are not natural, exogenous phenomena. They are social and ideological constructs. And bosses have constructed them to their own advantage.

Think of this another way. A Soviet communist official once asked Paul Seabright who was in charge of the bread supply to London, and was astonished at the answer “nobody” (or everybody). But imagine if there were such an official in charge. His job would be very complicated, and hugely pressured. Only a handful of people would have the knowledge and the talents to do it.

Does it follow that it would then be right to pay such an official a massive salary?

No, because there’s an alternative way of arranging the bread supply.

And a similar thing might be true for management jobs. The assertion that bosses must be paid a fortune because their jobs are so difficult begs the question in the true sense of the phrase; it assumes that the jobs have to be so complex when this premise should be questioned.

Now, you might object here that I am conflating two things: bosses’ pay generally, and that of individual bosses. Individual bosses must manage companies as they actually exist, not as they might exist.

True. If I were Chancellor, I would tell Hester that his job is to simplify RBS in such a way that it could be managed by people of moderate ability who wouldn’t need huge salaries. The problem is that bosses face insufficient pressures to do this.

Comments

[Rob]

Here's an interesting though experiment: under what circumstances should an employee legitimately be able to command the kind of salary that bank bosses do?

The argument for high salaries is normally that there is a combination of rare skills and high value which those skills can create. Musicians understand this - there's only one Lady Gaga and Lady Gaga-ness is valued by people who buy her records, so she makes a lot of money.

In my own experience, there are regular 'tech bubbles' when the number of people with the experience necessary to, say, create a particular kind of computer program is exceeded by the demand for such programming (and the value created by the programs is high). This can lead to high salaries persisting for several years, until knowledge of the technology becomes widely diffused amongst workers. This is basic supply-and-demand stuff, with the newness of the technology serving to provide a constraint on supply for a period of time. One could argue that technologists are acting much like bank bosses, introducing new complexity that requires people to pay them large consulting fees in the hope of being able to exploit it; this has to be weighed against the possibility that technology makes our lives better in a way that banking (in its present form) does not.

To some extent, we want workers to be in a position where, by becoming good at something, they can command high salaries. This will involve understanding the complexity inherent in solar panel manufacture, genetic therapies, 3D printing, highly-concurrent software design or any number of things that "people of moderate ability" might at least find difficult to grasp. Merely doing a job that others find incomprehensible is not necessarily a sign that your job is worthless or harmful in some way.

My own instinct is that we can't really judge directly what the appropriate level of complexity is for a bank. We probably need John Kay's oblique approach, a function traditionally performed by market competition between banks, with those carrying the dead weight of excessive complexity and oversized bonuses eventually succumbing to change or death. If we believe that simpler banks would be better, and we want this solution to come about, we probably want to restore competitiveness to the banking sector.

[Metatone]

I like Daniel Davies, so lets put his personality and talents in the best possible light in a counter example to his own tweet:

If you said to DD - here's X times your current salary, you're a smart guy, learn to sell off toxic assets and then do it - my suspicion is that he'd take the job on and make a pretty good job of it.

And that's one of the big problems with a lot of these arguments. I know people who can confidently say that tomorrow they have to go into work and do something no-one else in the world can do - because they invented the system and the knowledge has not yet been spread. But that doesn't tell us anything about whether or not we could skill up some more people to do it...

Another problem that will likely be invoked is time - we don't have time for DD to learn - but since all the Central Banks are offering to take toxic loans as collateral while you sort out what to do with them, that doesn't seem all that persuasive either...

[The_Analyst]

Why limit this conversation merely to banks? (and excuse me for quoting Forbes list/slideshow piece http://www.forbes.com/sites/christopherhelman/2011/10/12/americas-25-highest-paid-ceos/):

"Wall Street is conspicuously absent from the top 10. The highest paid “bankster” is Jamie Dimon of JPMorgan Chase, who comes in 12th at $42 million, while Larry Fink of BlackRock is 16th at $39.9 million. Goldman Sachs‘ Lloyd Blankfein is way down at $21.7 million.

Many other bank chiefs are also below the S&P 500 CEO average–which for 2010 was $12 million, down 20% from 2007 levels. Bank of America‘s Brian Moynihan and Citigroup‘s Vikram Pandit are barely worth agitating against at $2.3 million and $1.3 million, respectively."

Is the argument that CEO's across virtually industry have created (or maintain) such complex operations which enables them to rationalize their (relatively) astronomical pay outs? Would then the logical following argument be that by spinning-off or streamlining (whatever we deem "unnecessarily") complex businesses and let individual operators focus on those tasks that added so much complexity to the larger organization?

While "synergy" is often BS, if the goal is to remove complexity, a firm like Disney would never have succeeded. Nor would countless others. Did many of these CEO's get wealthy? Yes, but so did shareholders (which the majority of these CEOs also were).

I think the main reason behind soaring CEO pay is that its approved by the Boards, who themselves are seldom if ever held to account by shareholders (I'm looking at you big mutual funds).

[Mil]

For my sins, I worked in a bank for seven years in a capacity that become more and more lowly as time went by. After a couple of years, I was paid less than the average national wage to check account opening documentation in order to flag up potential money-laundering issues. If such issues were detected, the job was then handed on to other more specialised staff to further process. My department and its team eventually lost the work to elsewhere in the bank as the processes were chopped up and simplified in order to be able to train new people up faster and more cheaply. For a couple of years we were given a series of evermore routine data entry tasks, before finally being allowed to leave.

Big companies are very good at dumbing down processes - it's what they specialise in:

1) It protects them against the logistic disruption that is high staff turnover
2) It protects them against staff acting on resentment and contemplating taking business to other employers
3) It makes it easier to train up temps, substitutes and replacement workers of all kinds
4) It also possibly means that those who like to earn what they do can continue to do so *even when they are unable to fully control and understand a company's complexities*.

And as these organisations so demonstrably make a practice of dumbing down at lower levels in the hierarchies, it does beg Chris's question why they can't - or won't - do the same at the higher levels too. It's certainly not out of a lack of expertise or experience in the matter.

Or should we be looking to find the explanation to all of this in the plague that is managerialism?

[jameshigham]

The simple laws of supply and demand thus require that bosses be highly paid, don’t they?

Not necessarily.

Logical thinking this time round.

[Myer]

This discussion about job complexity and scarce skills seems to me to miss a crucial point: that the massive business failure of the banks shows empirically that those highly paid executives don't actually have the skills needed to do their jobs, however much they might be paid. The whole complexity/skills issue is a smokescreen for the naked greed of those in a position to make the decisions. There's no actual evidence to show that someone paid, say £150,000 - the salary of a very responsible senior manager in the public sector - couldn't do the job just as well as someone on several million.

[Guyonlife]

The skills needed to reform a company to be run by people with limited experience are far higher than those needed to run a complicated venture!

I am, however, available for the right price.

[alastair harris]

have oyu spotted your mistake yet? the scarcity is the number of those with a proven track record. Anyone could call themselves a CEO, there is no barrier to entry, apart perhaps from the sceptism of those making the appointments. I suppose a proposition that I don't have the experience but I am clever and could learn, is a subtle variation, but not one that will work in an interview, I would have thought for fairly obvious reasons.

[Adam Gibb]

It is not just bosses who have made banks so complex- governments with their laws and regulatory QUANGOs have played an enormous part in this. Of course, the established banks and other finance houses love this artificially created complexity, as it means that it is very hard indeed for new entrants to enter the market and compete with them! This is one of the major reasons behind the lobbying and regulatory capture that has already occurred. A dwindling number of institutions consolidate, become to big to fail- and et voila- you end up with the bailout fiasco.
My solution- total deregulation of all banking, allow poor performers to fail, and new entrants with novel business models (crowd-sourcing, DNA/quantum algorithms, good old 3-5-4) to start-up. Deposit insurance would be factored into the interest rate received by savers- they could pay varying amounts for different degrees of security.

[chris]

@ Metatone, Alastair. Yes, you could say the problem is a scarcity of revealed talent rather than of talent per se, as I discussed here:
http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2007/12/superstars-and.html
I was conceding this issue away, to focus upon another.

[Account Deleted]

The complexity of UK banking is a relatively recent invention. In the days of 3-5-4, most investment and merchant banks were relatively small and less complex (because more specialised).

The banking elite who drove the global mergers and product diversification during the 90s are the same elite that is now demanding a premium for managing the consequences.

Re RBS, why didn't the government simply ask for a volunteer to step in and sort out the bank as a patriotic duty, without payment of any sort beyond a knighthood? It's come to a pretty pass when we cannot expect The City to do its duty. Harrumph.

[Carla]

Anonymous,I dont think aoynne minds a differing opinion, as long as it is stated in civility.About having a renewed sense of hope - Id like to have that but with the debt at 11 trillion and counting and China cutting off the credit card, I just cant see how everything is going to work out fine.

[Yogesh]

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