Tag Archives: wall street

Income Inequality Levels Rising

Thesis: Pay inequality is at exorbitant levels and something must be done to stop this rising inequality.

The income inequality in America has gotten a lot of attention and press for a few years now, so one would think that all of this negative publicity surrounding it would cause this inequality to go away. However a recently released Harvard Business School study proved that “Americans might think they know how bad inequality is, but it turns out they actually have no idea. [This study] found that Americans believe CEO’s make roughly thirty times what the average worker makes in the United States, when in actuality they are making more than 350 times the average worker.” This disparity in incomes is at historic highs, and truly sad how uninformed Americans truly are at just how high this income inequality levels have reached.

The Average annual compensation for CEO’s is by far the highest in the United States.  Supporters of this pay gap may justify this by saying that they need these levels of compensation to remain the number one innovator and country and to attract and retain the most talented and successful CEO’s and businesses. But if this argument were to hold, then the bosses of Wall Street, long considered an area where some of the most successful and smartest people go, should have some of the highest disparities between the top bosses and the average low level employee. However as the Wall Street Journal reported, “The gap between what bank CEOs and their staffs take home in pay has narrowed significantly since the financial crisis, driven mostly by a drop in compensation for the leaders of the five biggest Wall Street firms, according to a Wall Street Journal review of bank regulatory filings.” This is a good sign as the average pay for worker at the top Wall Street Banks rose to new highs, the pay of the CEO’s remained well below their 2006 pre-recession highs.

As explained later in the article, “Wall Street CEO pay “just doesn’t have the leverage that it used to because in many cases the businesses themselves don’t have the leverage,” said Todd Sirras, a managing director at Semler Brossy Consulting Group LLC.” Another possible reason for the lower ratios of CEO to average worker pay for Wall Street is that everyone on Wall Street “even middle-tier finance workers are generally well paid.” While in comparison an analysis from last year, “estimated that it takes the typical worker at both McDonald’s and Starbucks more than six months to earn what each company’s CEO makes in a single hour.”

The income inequality is still high all over America, and must start to dissipate in order to not enrage all American workers. This can be done in many ways, raising the minimum wage paid to low level employees, or lowering the pay of top CEO’s. Either way, something must be done about the widening gap between America’s ellite and the average worker.

Reversing the Culture of Wall Street

The culture at large banks must be drastically changed to drive industry growth and success. In-house adjustments will have a greater long-term positive impact on financial systems than new outside regulations that may only be impactful short-term.

“As they emerge from years of bruising fines, layoffs and losses, big banks are trying more than ever to monitor employee attitudes and values to avoid future problems” (http://www.wsj.com/articles/as-regulators-focus-on-culture-wall-street-struggles-to-define-it-1422838659?mod=WSJ_hp_Markets3up).

Large banks are trying to fix their culture issues on their own, although they are pretty much forced to due to fear of drastic government intervention and regulation. There are many regulations in the banking industry, but in such a complex system like ours there is always the possibility of employees attempting to cheat the system by disregarding those regulations or through the use of regulatory loopholes.

“One consulting firm hired by a major bank determined it was a red flag when employees used the word “workaround” in internal communications, indicating a willingness to bypass set rules or policies” (http://www.wsj.com/articles/as-regulators-focus-on-culture-wall-street-struggles-to-define-it-1422838659?mod=WSJ_hp_Markets3up).

This is one of the reasons why, I believe, the change needs to come from the inside. Simply changing the system of regulation will not do enough, that has been happening for years and issues are still arising. If banks, or any company for that matter, have a corrupt culture, employees will always have an incentive to work hard to cheat the system. Doing whatever it takes to standout to senior management and the people that will eventually be determining whether or not they receive a promotion. If banks have a system that promotes and rewards ethical behavior exhibited by their employees, the incentive to cheat the system seems like it would be greatly reduced.

“The concern, the banks say, isn’t so much the black-and-white issues, like whether to take money from the till. The problems arise with the more nuanced situations, like whether to report a trading loss right away or to try to fix it before anyone else notices” (http://blogs.wsj.com/moneybeat/2015/02/02/what-banks-are-doing-to-improve-their-culture/).

It seems how banks measure success plays the largest factor in their employees’ behavior. Everyone wants to attain that “big” promotion, or standout amongst their colleagues, and I believe, especially in finance, they will do whatever it takes to achieve that goal. If taking large risks, or disregarding the rules and regulations is the method of achieving success, then that will be the type of behavior and performance exemplified by a company’s employees. However, like I mentioned above, if success is measured as people who behave ethically, for example by not ignoring unethical actions and going as far as actually reporting those actions to managers, then employees will strive to behave in that way when they are trying to climb to corporate ladder. It seems that all people want be successful and most of the time they will do whatever it takes to achieve success, no matter how it is defined. Changing the way individual banks measure success, in-house, could go a long way in changing the culture of Wall Street as a whole.