What Wall Street does right
October 16, 2014  

Wall Street is evil. It's a mathematical fact. However, they do one thing that I agree with: they pay their employees well, and they do this by prioritizing employees over shareholders.

When a company makes a profit, it can disburse it to shareholders, executives, or employees, or it can save the money or reinvest it into the company. As this article explains, the finance industry allocates more of its profit to employees than other industries. In fact it pays employees 48% more than other industries pay for equivalent jobs. The reason is

Rent sharing—the idea here is that the finance sector produces larger rents (surplus profits) than most sectors, which are then shared with the workforce.

… the finance sector pay premium is received by all workers—regardless of their position in the wage distribution or the job they do …

For example, on average in the non-finance sector, a 1% increase in rents is associated with a 0.15% increase in annual wages. In the fund management and security broking sub-sectors of finance, however, this figure is 0.9% and 0.63% respectively.

(Via Marginal Revolution.)

In other industries, the worker's share of income is at its lowest since 1950. Even the tech industry, which has the reputation for paying employees well, in fact devotes more profit to stock buybacks (which benefit shareholders), and conspires to hold down salaries. Furthermore, the tech industry holds much of its profit overseas; on Wall Street, such profits would have been disbursed to employees.

Companies should favor employees over shareholders, because employees create value and are invested in a company's success, over the long term. Shareholders usually don't know anything about the business of the company; they don't care about the business, only the stock price, which they themselves determine with other shareholders. Horace Dediu make this point better than I can starting at 3:23 in this episode of his podcast.

Wall Street knows shareholders better than anyone else, and they treat their own shareholders worse than anyone else. The rest of the corporate world should follow their lead.