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Sunday, February 5, 2012

Personal leverage-the reason for high finance salaries

The mass media loves to question whether MBAs deserve the high pay that they command. While I did partly state my views on banking compensation in an earlier blog post on clawbacks/deferrals (http://apoliticallyincorrect.blogspot.in/2011/04/no-payment-for-failure-absurd.html), its time to explain another reason why this pay is justified.

With the advent of mass media, sports events could be broadcast live to millions/billions, thereby increasing the addressable market, advertising revenues and consequentially athlete earnings. Similarly, the advent of global telecommunications(ICT boom) has allowed organizations to act global yet think local. In the finance world, the whole network can be leveraged behind a single trade to ensure that the bank acts as one to close business. With the world as an oyster, is it any wonder that trading desks with a handful of people routinely generate billions for dollars? After all, they can peggyback on old client relationships, global teams, structuring solutions, transnational risk appetite/funding etc. While some may argue that the platform determines the profits more than any individual, few banks would agree with you, and therefore fix a target compensation/profit ratio upwards of 40% even in these tough times(earlier it used to routinely cross 60%). The rationale is that if the person can impact the global network in such a significant way, recognize rewards accordingly. Similar arguments hold for the finance personnel in global shared service centres, who number few but who are exceedingly well paid.

This blog post does not defend any purported compensation excesses, but just makes the case for why MNCs can afford to pay their staff better than local peers, and why finance roles usually pay higher than in other industries. The above is just one reasoning, there are other reasons as well.

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