Serial entrepreneur Penny Hersher worries about a talent-retention challenge if Wall Street eschews bonuses this year. In response to a Bloomberg article on public objections to mega-bonus payouts to Wall Street executives, Hersher says that “talent” follows money, and if the money goes, then the “talent” that financial institutions need to flourish will likewise disappear. OMG, she writes! “Our best deal-makers will go where the money is and that better be in the Untied States and at the institutions that make our financial systems work.”
Excuse me? “Make our financial systems work?” The compensation structure on Wall Street is the major reason our financial systems don’t work!
Hersher assumes that without proper compensation an active, dynamic, international labor market will lure away an impressive cadre of Wall Street talent that has for years juiced revenue and earnings precisely so it can inflate its year-end bonuses. But this market has collapsed. To what new suckling breast will the securitizers and traders and analysts flee as markets and banks crumble around the world? And in the new world of highly regulated bank holding companies that will emerge from this wreckage, who will want their skills, their rancid flesh aboiling with the mortal sins of gluttony, avarice, fraud, theft, and cheating.
But that labor market reality is a trifle. No one suffering in middle America – because they have lost their job, cannot afford health care for their children, cannot make payments on their homes, cannot send their children to college, or cannot pay taxes to fund public schools, pave roads, and pay for police protection – believes that our most urgent need at this moment in time (or any moment in time) is to dispense obscenely outsized bonuses to Wall Street plunderers and pirates.
For this reason, the deep and abiding issue is whether Hersher is correct in her belief that money alone motivates talented people. Let’s push her vague definition of “talent” aside for the moment so we can be very clear. There is a huge amount at stake in the validity of Hersher’s belief, because the entire Wall Street economy has for years rested upon its shaky, misbegotten foundations.
There are three problems with the “talent follows money” equation. The first is the assumption that organizations are simply collections of self-seeking individuals. The second is that idea that the most talented people will invariably follow the money (as opposed to merely the greediest people). The third problem is the belief, prima facie, that because someone has been paid a lot in the past, they deserve even more in the future.
Let’s attack all three problems at once by looking at everyone’s favorite behavioral laboratory – major league baseball! In 1989, Michael Lewis published Liar’s Poker, in which he nailed the go-go years on Wall Street in their infancy. Fifteen years later, he published Moneyball, which cracked open the science of sabermetrics, but which even more profoundly laid bare the truth about the delicate relationship between talent and money. Moneyball is a filigreed, layered sequel to Liar’s Poker, justly regarded not simply as one of the better baseball books of all time, but as one of the most interesting depictions of organizational and managerial behavior ever written.
What we know about major league baseball, from watching the Yankees implode year after year, is that compensation often rewards past performance, but does not predict future performance. In 2008, with a payroll of $43 million, the Tampa Bay Rays won 97 games while the Yankees, with a payroll of $207 million, won only 89 games. The best general managers in baseball, starting with Oakland’s Billy Beane, know that success is about creating highly functioning, cohesive organizations out of 25 gifted, competitive, volatile, young athletes ever at risk of being led astray – as Honest John leads Pinocchio astray – by temptation (here, substitute Scott Boras for Honest John).
What young general managers around the league have grasped, partly with the guidance of sabermetrics, but just as surely with insights about human behavior, is that talent is not static. Talent is developed. Teams take advantage of developing individual talent tactically and situationally. A player who performs well in a National League park favoring left-handed hitters may lose 50 points in his average in an American League park favoring right-handed hitters.
Moreover, talent ripens like a fruit. In an expensive labor market, one wants to pay while the fruit is still green and mysterious, take advantage of its ripening, and then discard it at the peak of of its freshness, preferably for new fruit that is newly awakening to its own promise. How often have we seen players such as hypo-performing slugger Richie Sexson take advantage of favorable circumstances to post outrageous numbers, sign an equally outrageous contract on the free agent market, and then implode? Sexson received nearly $16 million from the Mariners in 2008 to bat .218 and hit 11 home runs.
In reality, the “best” players are the ones that help a team win. They may not be, and in fact likely will not be, the most expensive players on the market. They are the ones with “upside”, the ones with passion, the ones who want to grow and learn, the ones who understand that if the team wins, the individual rewards will follow. The money is not unimportant to these players, but they possess the capacity to absorb the financial incentives within a larger and more complex array of motivations that are primarily non-monetary. Who, with a straight face, can claim that Wall Street plays by these rules, and that the rules by which Wall Street instead does play have truly served well both its institutions and its far-flung web of dependents?