Why Finance (Salaries) Won’t Change

The more things change, the more they are the same.

In a drought, the river may dry up, but the lay of the land stays the same. When the rain returns, the waters will flow the same way.

The structure of the Finance industry (the lay of the land created by laws, technology, and customer demographics) creates the environment of high salaries for each individual financial services worker. When a small group of people can effectively scale their skills (and their skills cannot easily be replaced by computer), that group of people will make a disproportionate amount of money per person.

Look at the money management industry. The cost of managing $500 million and the cost of managing $5 Billion is not very different, and neither are the amount of people required. So if the management team gets 1% of the Assets Under Management (AUM) in the first case, they earn $5 million. If they get the same percentage in the second situation, they earn $500 million.

On top of that math, the small pool of people involved means that individual reputations matter as much or more than the reputation of any firm. For example, in investment banking, if a deal maker wants to leave his employer, she will probably be able to take many customers with her, since she is the person behind the relationships and the reputation behind the deals. This again increases her compensation since her company and its rivals will compete to employ her.

The employers and products might change, but the underlying structure of the finance industry and the economics of the finance labor market remain unchanged. Short of game changing regulation, business will go on as usual — or is it that business as usual will go on?