Compensation in the Financial Sector: Are all Bankers Superstars?

Abstract

Based on a survey among French graduate engineers, I show that higher returns to talent may account for rents in the financial sector. I develop a model in which firms compete for industry-specific talent. Talent is either revealed or acquired on the job, is scalable and can be transferred across firms within the sector. As once revealed it becomes public information and workers cannot commit to long-term wage contracts, the latter capture all the benefits of the talent discovery process. Their limited ability to pay while entering the industry leads to excessive rents. This model predicts empirical implications concerning wage distribution, career dynamics, size of the stakes, and the use of variable compensation that fit the financial sector particularly well. First, the distribution of wages is highly convex and right-skewed. Second, higher returns to experience in the first years account for a large part of the premium. Third, wages are correlated with size at stakes and the average size within the sector. Finally, the use of variable compensation appears consistent with talent retention motives. Keywords: Finance, compensation, wage distribution, wage structure, incentives, superstars

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