At the height of the Gilded Age, the American sociologist Thorstein Veblen criticized the country for “conspicuous consumption”: the lavish and arbitrary spending on goods and service merely for the display of wealth.
Today, even in the midst of recession and what some would dub a second Gilded Age, we have our own arbitrary displays of wealth. But, more uniquely, our time in history is defined by “conspicuous compensation.” The amount that some people are paid—especially those who are paid with the country’s common cents—seems to lack all common sense.
Last Friday, the U.S. Treasury “pay czar” officially mandated pay cuts for the top 25 executives at seven firms that received bailout money—including Citigroup, AIG, and Bank of America. On top of that, the Federal Reserve has now put forth a proposal to have veto power over every bonus of every financial firm—even those who have not received Troubled Asset Relief Program money.
Unfortunately, the cuts will do little to nothing to address the source of our financial woes. It’s frustrating. Many are bloodthirsty, and having resorted to a tool that is so seemingly “un-American” as a pay cut, we might expect substantial change to come quickly. But, sadly, the cuts initiated by Special Master of Executive Compensation—and yes, that is his real title—Kenneth Feinberg are little more than a political palliative. In fact, at Citigroup last week, top officials assured worried executives and traders that “the net impact of Mr. Feinberg’s rulings will be minimal because the cut salary will be shifted from cash to longer-term stock grants.” In order to change the incentive structure that led to the financial crisis in the long run, there must be stronger, simpler institutional changes than indiscriminate executive pay cuts or even bonus regulation.
Nonetheless, the debate about pay cuts raises questions about whom we value in society as far as professions go. What, exactly, makes the top executives at Citigroup worth millions in the first place? And I’m not talking about executives who had a heavy hand in our collective downfall—I’m questioning the income finance executives in general. Often, the top 25 executives aren’t the ones who make or break a firm.
Most Americans have little connection to the titans of finance. They don’t provide many jobs to average Americans, they produce no new innovations of use to the ordinary American, and they work primarily for the benefit of a few individuals and their pensions.
The central issue is that executive compensation packages are not a product of market forces. There is no simple way to determine the value a single individual creates in a large financial firm. In fact, finance executives get generous compensation packages even when firms do poorly and workers are laid off. Performance and pay are not inextricably linked.
In truth, the top executives at many financial firms are paid much more than they should be and well beyond what reason dictates. It’s a self-fulfilling prophecy in finance culture: The continually rising size of the compensation packages has led candidates for executive positions to expect big payments. It has led boards to fear the consequences of not fulfilling those expectations.
Many complain that the new government-mandated pay cuts will cause firms to lose top talent. But, right now, the seven bailed-out and cut firms are in the same boat as other companies: They’re not hiring.
Some contend that heavier regulation of the banking industry will cause a brain drain from finance. The best and brightest will depart for other professional fields. But as an American who grow up valuing people who contributed to the well-being of others, I have no problem with that. I respect my friends who work in finance and their life choices, but if future generations are more prone to go into engineering or medicine, then that’s all for the better. The banking image should be boring again.
At the end of the day, astonishingly high pay for finance executives speaks mountains on what America values—or at least what it deems allowable to be valuable. There was a time when there was a stigma around jobs that benefited only the wealthy. Now there’s a sense of approbation—especially among my generation.
I don’t think the administration should demonize Wall Street or the financial sector in general, but we need to seriously think about what we as a people value most. We could use a little more common sense in thinking about common cents.
Raúl A. Carrillo ’10, a Crimson editorial writer, is a social studies concentrator in Lowell House. His column appears on alternate Fridays.