Why footballers (may) deserve ridiculous salaries and bankers don’t

In spite of £8.2bn pounds in losses, the Royal Bank of Scotland is going to pay £588m in bonusses to its staff. The CEO of the – taxpayer-owned since 2008 – bank said that the issue of bank bonuses was a sensitive one, but that “I need to pay these people fairly in the marketplace to do the job”. The argument that is often put forward to justify the high salaries of bank executives – or of any executive, for that matter – is that they are like top footballers: they have a very specific set of skills, and if their salary doesn’t match up what is offered by the competition (other football clubs, other banks), they are going to go elsewhere. Greg Mankiw, for instance, recently commited another piece defending the one percent by drawing on similar or connected arguments. Moreover, since objections to banker salaries are allegedly only based on envy, we should also be angry at footballer salaries and the ridiculous amount of money that Wayne Rooney of Cristiano Ronaldo receive every month.

I think that the conflation between bankers and football players (or singers, or actors) as two similar categories of jobs is highly misleading if one considers the marginal value of individuals and their replaceability as determinants of value. As good way to assess these two factors is to replace both bankers and footballers by chimpanzees.

First, I  have my doubts about the added value of one particular individual to the collective endeavor he/she is a part of in the context of banking or large corporate structures. I simply cannot understand how the added value of only one person in an organisation which counts many thousands of can be justified by salaries sometimes a million times higher than the grassroots employee. If you remove Brady Dougan from the headship of Credit Suisse and replace him with a chimpanzee, probably not much will change in the short term because thousands of other people work in the bank and ensure its daily operations. Arguably, the bank may actually do better. Remove Diego Maradona from that game against England in 1986 (and replace him with a chimpanzee) and you have a completely different outcome. Remove Humphrey Bogart from Casablanca and you have a totally different movie. The marginal contribution of football players and actors is much bigger than that of CEOs.

Second, and perhaps more importantly, the individual characteristics of corporate managers (which influences their replaceability) matter much less than those of football players or actors for the product that they are selling. In this respect, football players are much less replaceable than CEOS. I do not have a bank account with Natwest because of its CEO (whose name I don’t even know), and I do not buy a MacBook because Apple is headed by Tim Cook. People more or less place the same value in a product of service even if its CEO changes. However, I may go to see a movie because it’s got Kevin Spacey in it. Similarly, Real Madrid bought Cristiano Ronaldo because of his possibly unique free kicks and speed, but also because they can sell millions of overpriced shirts with “Ronaldo” (and not “chimpanzee”) written on them. It is much more difficult to replace them because they are part of the product themselves. I am not saying that the contribution to humanity of Cristiano Ronaldo is bigger, but many parallels often made in the press about the low replaceability of managers – especially by managers themselves – are simply not justified. I simply do not buy the idea that there are only a small handful of people who can run a big bank, but I may agree that only a handful of people can shoot free kicks like Cristiano Ronaldo.

One thought on “Why footballers (may) deserve ridiculous salaries and bankers don’t

  1. dbexy0947

    This is far too a simplistic take on things. You know what Ronaldo does because he is on TV and you can see a goal or an assist, you can see kids wearing his shirts. You have no idea how complex running a multi-national, multi-product company is. Don’t get me wrong, mistakes have been made and senior management need to be accountable, but a monkey cannot run a company. Do you honestly think that it is all about convincing you to put your savings in NatWest or Barclays? Below management level, individuals can make their complany a lot of money and it is a huge difference between the star trader (for example) and an alo-ran in the same job. If that individual brings in profit of say $100m in a year, do you think they deserve a bonus? There is complexities here, such as the risk allocation to that, but this is a very tangible return to their employers and shareholders. Competitor firms or banks will want to attract these individuals and so they need to be paid to keep them. Note as well that a footballer on say 100k a week has an extraordinary salary, and get given long-term contarcts at that inflated salarly, say 5 years, with not much of their total compensation linked to perfomance. Bankers can get paid very well, but a lot of this total compensation is from bonuses and therefore linked to perfomance. At CEO level, this is more difficult to calculate as managment of a huge complex machine, means more intangible to calculate value to shareholders. However, do not take the difficulty of that job lightly. I guarantee that that CEO works much longer hours than Ranaldo and only reached that position after working hard for a many many more years. Ronaldo is a special case of course, but consider the multi-millionaire failures that roam the Premier League, not performing, but locked into big contracts.

    Reply

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s