Well Paid or Overpaid?

         “Ugh, now I have to go find a husband in finance,” says Kaylie Hooper, the character by Chloe Grace Moretz in the finale of the hit show, 30 Rock. After losing to her arch nemesis, Jack Donaghy, in the final show down for the control of Kable town’s NBC, she says the line to poke fun at her own misfortune. Outwitted by Jack’s clever and ingenious plot, she now has to find a new way to make money rather than take over NBC as Hank Hooper’s favorite granddaughter. This may seem like a tangent, but behind the witty line that gave all of us this light chuckle, there lies a truth about the financial industry. People think and know that financial professionals are well paid.

         Out of all the jobs in the world though, why do the financial professionals get paid more?

         Well, for the people in the financial industry, some think they are paid well because they work hard. From the preparation and degrees required, the skills and knowledge preferred, and the long hours demanded, a career in the finance does seem like it takes a lot. It takes years of hard work in High School to do well on exams, get good grades, and gain valuable extracurricular experiences for a shot at a good business school. After that, the process is repeated again in college for a chance at a good internship. Then, after a summer (or summers) of going into work early, leaving late, picking up projects, and networking with everyone, they may be able to land a full time offer after graduation. Yet, even then, the hard work continues. People are not only expected to increase their value at work, but also expected to further themselves in different degrees, certifications, and licenses as time goes on. In such a rigorous career path exacerbated by the cut throat environment, financial professionals see their salary as the fruits of their labor, and why shouldn’t they? Factoring into all the preparation done for their career in finance, it is not unreasonable to see why finance people see their pay as a justified reward to their long term trade off. While this is a big generalization, it does capture some sentiment of the people on the inside. A major flaw with this explanation is this disclaimer: working hard does not necessitate better pay. I am sure all people work hard in their job to make a living and it is important not to discredit the work of others. Just like my professor once said, “while great investors like Warren Buffet do work really hard to get to where they are today, I am sure the factory worker who has labored himself all his life diligently did not have it any easier.”

         For people on the outside, they think financial professionals “make bank” because they are smart. While finance is really not “rocket science” and anyone with commitment and education can do it, they do have a point. What they are saying is that by supply and demand, finance pays well. Since the finance industry provides many important functions in society such as bank deposits, mortgages, insurance, and investments, there will be a demand for finance. As a result, the finance industry’s pay depends on the supply of the people who can perform these roles. When there are not a lot of people who can do these jobs, naturally, they will have more bargaining power with the employer to get more money. While there are a lot of aspiring investment bankers running around every college, if we look at the entire population as a whole, these people are definitely still a small segment. If the picture is not clear enough, let’s look at it this way, if we look at the number of people who are able to value Facebook’s growth potential and cash flow versus the number of people who are qualified to be the store greeter Wal-Mart, then we can see how supply and demand is at work here.

         While supply and demand makes sense and can also be used to justify the sky high pay of professional athletes, I believe there is more to the reason behind finance’s high pay. To me, financial professionals are paid well and will always be paid well because their business directly deals with money.

         From the early subsistence economy where goods and services are merely exchanged to the complex global economy we are in today, people continue to build wealth through the exchange and use of goods and services. One thing that differentiates these two different forms of economies though, is money. Money provides a store of value and a universal medium of exchange. Back then, farmers plant crops and trade with fisherman who fishes. One party receives protein and one party receives grains. Yet, they traded for just the amount they needed. Since the raw fish will go bad in a few hours, the farmer will not trade for more fish than he needs despite how much the fisherman needs his grains.  He would rather trade for something else no matter how many fish the fisherman is offering. Yet with the advent of money, everything changes. The farmer can now “sell” his grains to the fisherman for as much as the fisherman wants and use that money to “buy” some fish and save the rest. The saving, a newly generated value that was previously wasted, can now go on to help the farmer buy more goods and services. This allowed the economy to grow and developed into the world as we know it today.

         Fast forward to centuries later, the financial industries have evolved into the biggest beneficiary of the invention of money. The financial industry has been able to maximize money’s durable, divisible, transportable, and non-counterfeitable characteristics. For example, banks deal directly with money by collecting money from customers’ deposits and investments and lending them out as mortgages and loans. For their business, they earn interest from lending out and borrowing money from others. By taking advantage of money’s inherent characteristics, they save cost effectively and sustainably. For instance, banks’ assets, its reserve of money, do not rot due to heat, do not go out of fashion, and do not become obsolete in any shape or form. They also can be divided into smaller bills, coins, and fractions of pennies as well as wired and transported over a split of a second. Lastly, the government protects the value of the money and forbids counterfeits. While other industries need to refrigerate its supplies, have massive sales to clear out unwanted inventory, pay hefty sums for cargo transportations, and fight in lawsuits against counterfeits, banks are completely free of such concern. As a result, the financial industry can effortlessly pay its employees in money without the time and value loss other industries go through in converting their goods or services into money.

         I understand that this idea may cause some confusion, let’s also look at it this way. As we know, the sun indirectly provides us the energy we need. The sun’s power goes through several rounds of conversion, decreasing the level of energy in reach round, until it reaches us. From grass’s photosynthesis, cattle’s grass grazing, to the food in our stomach, energy is lost on each level. Similarly, a company loses value to its middle men in each round of good and services’ conversion money. On the other hand, the financial industry is the equivalent of absorbing solar energy directly without the loss in value or energy. This is why the financial industry is able to pay out such big salaries. This analogy may help, but readers have to take note of one thing. While the sun generates its own energy as a star, the financial industry relies on the activities of other industries. This is a big reason why the bankers’ pay have come down and a story for another time.

         For many, the financial industry is paid more than its social value, arguing how many financial services are merely mirroring the overall market activities. Some go even further to criticize financial professionals as overpaid and irresponsible bet takers. Regardless of the merit of the financial industry, it is interesting to always ask and answer the question of “why are financial professionals paid so well?” Especially resonated in the public in the Occupy Wall Street Movement and the recent European decision to cap bankers’ bonuses, this debate will continue to go on.