Pay Perils

The financial crisis is a horrible thing, a cascading series of events that has ruined or seriously damaged the lives of millions of Americans. It's also a reminder that pay-for-performance isn't just an issue that the federal government has to figure out: the financial sector has an aggressive pay-for-performance structure. Reihan Salam defends it as an economic system:

But note that bonuses, commissions, and piece-rates are used throughout the economy, and indeed had been fairly common in the service sector long before the financialization of the U.S. economy took off. The reason these forms of compensation proved successful is that, in the so-called "war for talent," they proved a powerful inducement for highly-productive and potentially footloose workers to stay on the team.

As advanced economies have shifted from manufacturing, and in particular forms of manufacturing that involve repetitive tasks, to highly complex services, it hardly seems surprising that we'd see more room for performance pay. The productivity gap between one employee and another matters more. Moreover, the rise of bonuses had another happy consequence. In his 1984 book The Share Economy, Harvard economist Marvin Weitzman called for heavier reliance on bonuses (gain-sharing or contingent compensation schemes) on the grounds that it might smooth out the boom-bust cycle: bonuses would allow firms to lower costs without shedding workers.

But Mike Konczal has doubts. It's definitely interesting to look at the problem from the other side of the mirror. And I'm not sure government or the financial services industry has achieved the right balance.