Some good news: the best efforts of the European Union to impose a restrictive bonus cap affecting this year's bonuses, have come to nothing.
The EU was attempting to cap bonuses at 100% of salary as part of financial legislation (CRD 4) to be introduced in January 2013. Bonuses for this year would have been affected.
Instead, the EU indicated yesterday that it will delay the legislation until March 2013. As a result, investment banking bonuses for 202-2013 will not be affected (unless you have the misfortune to be working at Nomura or Macquarie, which pay bonuses after this date).
Alex Beidas, an employee incentives lawyer at Linklaters said the EU has been pushing hard for a bonus cap, but has got nowhere: "There has been a real push in recent weeks by those in favour of the bonus cap to reach a compromise so that the cap could be approved by the new year. This is now not going to happen which will be good news for the banks.”
The bad news
Unfortunately, the good news about the EU coincides with the surfacing of an academic study released in October by Harvard academics in the Quarterly Journal of Economics. This underscores just how overpaid financial services professionals have been in the past few decades.
The charts below, which show the relative evolution of US financial services pay to non-financial services pay, will be familiar: a similar chart has been doing the rounds for some time.
However, the new charts are more detailed and more depressing.
The academics found that workers in finance earned the same education-adjusted wages as other workers until 1990. However, by 2006 finance professionals were earning an average premium of 50%. This was the outcome of a dramatic shift that began in the 1980s as the finance sector returned to being a high skill/high wage sector. The academics suggest that this was due to lax regulation (Glass Steagall) which allowed for more creativity and resulted in greater profitability.
As regulation creeps back up again - and the EU's full package of measures comes into effect next year - the implication is that pay in financial services will fall substantially relative to other industries. The only good news is that the Harvard figures date back to 2006, suggesting that some of the decline has already happened.
1. Relative education and relative wage
In the graph below, education refers to the share of workers with more than simple high school education working in the finance sector. Relative education reflects the difference between the share of educated people in finance and the share of educated people in the non-farm private sector.
Relative wage refers to the ratio of the average wage in finance to the average wage in the non-farm private sector.
From 1980 onwards, the comparative level of education and the comparative level of pay in financial services went through the roof.
2. Finance vs. law, manufacturing and healthcare
In the graph below, the employment share of the top decile is the share of workers in a sector which earns more than the economy-wide top decile wage (the economy-wide wage calculation includes finance, but excludes the farming sector). The relative employment share of the top decile shows the difference in this share between top earners in finance and other industries (law, manufacturing and healthcare).
Meanwhile, the wage of the top decile shows the average wage earned by workers within the top decile of each sector. The relative wage is the ratio of the average top decile wage in finance to the average top decile wage in the other sector.
The charts below show that finance professionals started earning a lot more than lawyers and healthcare professionals in the 1990s, and lot more than high earning manufacturing professionals in the 1980s. Lawyers' pay is most equivalent to pay in financial services. In 2006, the average highly paid financial services professional earned 2.5 times more than the average highly paid healthcare professional.
Compared to law and healthcare in particular, the proportion of highly paid financiers didn't rise significantly versus the share of highly paid lawyers and healthcare professionals. In all three industries, pay became focused on the elite. From 2000 onwards, highly paid lawyers attracted a greater proportion of law pay than highly paid financiers did of finance pay.
3. Insurance and retail banking wages didn't increase
This chart clearly shows that insurance and 'credit intermediation' areas of banking didn't benefit from the increase in pay: this only applied to 'other finance' - namely investment banking.
4. Pay rose as tasks became more complex and less routine
Finally, the charts below suggest another reason for the significant relative increase in pay in finance: from 1970 in particular, jobs in finance became more complex and less routine in nature. The increase in pay could be seen as a lagged effect. As more trades are conducted electronically and cleared centrally, it's likely that may roles in financial services will become less complex and more routine in future. A lagged decline in pay may result.