Thursday, 9 April 2009

The (partial) Redemption of LLoyd Blankfein

NPR aired an interview yesterday with Lloyd Blankfein, whom I had criticized for his remarks the previous day to the Council of Institutional Investors that bank employees should be paid mainly in the form of restricted stock. NPR's Robert Siegal asked Blankfein to respond to Steven Pearlstein's comments in the Washington Post that the real problem with Wall Street pay is not its structure but rather the overall level of pay. In his reply, Blankfein went some way toward redemption for his previous comments.

"In our system, there are markets for things. There are markets for talent. There are markets for people who can draw people into movies, work in theater, baseball players. As long as the markets are working correctly, and are not impeded, I’m generally agnostic on what the price is that gets in there. If [an employer] knows that this activity is only worth that much money and sets a price.... That’s generally not the way the system works."

To which Siegal replied, "There's an argument though that if compensation is so high -- as it has been -- that it might actually encourage risks that are imprudent."

Of course, this isn't an argument; it's a conclusion -- one we've heard many times. I only wish someone would make the effort to articulate this argument clearly so that the rest of us could either be persuaded by the argument or offer a critique of the argument.

As part of his response to Siegal's statement, Blankfein replied, "...if you depress prices, talent will flow away from that into something else."

Siegal jumped in: "A lot people hearing that now -- a lot of people who aren't in the financial sector -- are saying 'Where would it go? Where would the talent leave Wall Street for in today's market?'"

At that point, Blankfein offered a very useful reminder.

"I’ll accept the premise that the numbers with the benefit of hindsight of course look much too high because today they’d never be those numbers. Because today, people aren’t creating that kind of value, and so it’s almost a foreign thought that we ever could have been in that world. But let me transport you back to 2006 and 2005: In those years, Goldman Sachs actually had issues retaining our talent. And I think it's kind of well-known that a lot of the people who created private equity firms and hedge funds were people who were alumni of our firm. And they weren't alumni who necessarily ran through their whole careers and retired from Goldman Sachs. They were people who, in the prime of their careers, when they were still creating enormous value for the shareholders of Goldman Sachs, decided they had more lucrative alternatives outside the firm."

With these remarks, Blankfein reminded us that our current system for determining compensation is for employers and employees to freely contract in a market for labor governed by supply and demand for talent. With this system under populist attack, Blankfein's reminder is particularly timely and appreciated -- and it goes some way toward redemption for the populist comments he made the day before. If more business leaders would make the case for market-based compensation, we'd stand a greater chance that the current system will carry on into the future. Despite recent events in the economy and the financial markets, the use of markets to determine wages has proven better at allocating labor resources in an economy than any other system, and we should avoid the impulse to do away with this system in the current populist zeal for reform.

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