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Mr Yogi

Why Is City Pay So High?

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I know nothing of the workings of the City and am quite happy to keep it that way.

However, one thing niggles me.

We are always hearing reports of the vast amounts earned by traders, brokers etc and the huge bonuses they receive. Presumably, this money comes from the commissions earned by their employers from their clients.

Why though, do the clients happily go on paying such high levels of commission?

The thing is, in any other sphere of business, such amounts being earned would attract entrants into the market, competition would increase and prices would be driven down.

This demonstrably doesn't happen in the City. Why not?

I can only think that a giant cartel is at work here to prevent a competitive market and to protect commission levels.

Has anyone any insight?

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take stock trading.........

the founding agreements to found a "mutual" organisation even hundreds of years ago is actualy a cartel structure

http://en.wikipedia.org/wiki/Buttonwood_Agreement

hence why investment banks want to form new cartels "project turquise" etc to take liquidity from the newly privatised but competative exchanges such as LSE NYSE NASDAQ etc.

liquidity has momentum. and Open interest has momentum

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I am fortunate enough to be one of those guys getting paid in The City and I understand what you're referring to. However, the fact is that the industry is the ultimate meritocracy and your pay reflects your contribution to the company you work for.

There are no "barriers to entry", I didn't even go to Uni but worked my way up through the ranks by hard work and diligence. Admittedly the old "barrow boy made good" scenario is harder to achieve now as the majority of investment banks don't look far past Oxbridge grads for their new recruits but if you want it enough you can get in. Ultimately I generate several millions of pounds a year for my company, something which not many other people can do and for that I get well-rewarded. The hours are long, the work is stressful and intense. My day begins at 6.30am and effectively finishes at 9pm when the US market closes. Family holidays can be cancelled at a minutes notice (I was called back from my honeymoon!!) and even when you're away you have to be in contact with the office on pretty much a daily basis.

Anyone who wants this kind of lifestyle, and the rewards that it brings, is welcome to try but it's simply not something that everyone can cope with. As with anything it's all about supply and demand. If there were 5 million people in the country that could do want I do I'd probably earn 25k a year but there aren't. I don't mean this to sound obnoxious but I liken what I do to Premiership footballers (although I'm nowhere near that talented). The biggest and best teams (banks) want the most prolific strikers (profitable traders) and will pay what it takes to get them. If I can generate $5mln more than the next man am I not worth $1mln of that?

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also when ever you have to use a broker....

broker=middle man.

he will look at you position your orders and screw you over.

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I am fortunate enough to be one of those guys getting paid in The City and I understand what you're referring to. However, the fact is that the industry is the ultimate meritocracy and your pay reflects your contribution to the company you work for.

There are no "barriers to entry", I didn't even go to Uni but worked my way up through the ranks by hard work and diligence. Admittedly the old "barrow boy made good" scenario is harder to achieve now as the majority of investment banks don't look far past Oxbridge grads for their new recruits but if you want it enough you can get in. Ultimately I generate several millions of pounds a year for my company, something which not many other people can do and for that I get well-rewarded. The hours are long, the work is stressful and intense. My day begins at 6.30am and effectively finishes at 9pm when the US market closes. Family holidays can be cancelled at a minutes notice (I was called back from my honeymoon!!) and even when you're away you have to be in contact with the office on pretty much a daily basis.

Anyone who wants this kind of lifestyle, and the rewards that it brings, is welcome to try but it's simply not something that everyone can cope with. As with anything it's all about supply and demand. If there were 5 million people in the country that could do want I do I'd probably earn 25k a year but there aren't. I don't mean this to sound obnoxious but I liken what I do to Premiership footballers (although I'm nowhere near that talented). The biggest and best teams (banks) want the most prolific strikers (profitable traders) and will pay what it takes to get them. If I can generate $5mln more than the next man am I not worth $1mln of that?

a fair point, the best of the best in any industry always get well paid and i wouldn't begrudge them that. The city's pay is always news but i am sure the best in most industries get paid well.

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a fair point, the best of the best in any industry always get well paid and i wouldn't begrudge them that. The city's pay is always news but i am sure the best in most industries get paid well.

Indeed. A point to note as well is that the City is p/l driven, which means individual performance is readily measurable in money terms, and it is also the case that (obviously) they will get a cut of profits. With other occupations, it is difficult to measure to value in monetary terms, and if this value could be measured, it would be difficult to monetise this value to be used to pay the employee.

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Isn't the problem that City types reap the "rewards" when things go well but often aren't there to reap the whirlwind when things go wrong... or worse want to socialise the costs when their calls go tits up?

If the investment banks simply don't know their exposure to CDO's or worse don't know how much some of these instruments are worth how can they possibly know what to pay those involved?

It seems to me that the investment banks have made some pi$$ poor judgement calls in this regard and rather than supporting these errors the central banks should be letting the market do it's job NOT pumping liquidity in at reduced rates. If banks have made mistakes they should go to the wall the same as any other industry. Then city types would be earning their money - as it is they are on a win-win bet.

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I am fortunate enough to be one of those guys getting paid in The City and I understand what you're referring to. However, the fact is that the industry is the ultimate meritocracy and your pay reflects your contribution to the company you work for.

There are no "barriers to entry", I didn't even go to Uni but worked my way up through the ranks by hard work and diligence. Admittedly the old "barrow boy made good" scenario is harder to achieve now as the majority of investment banks don't look far past Oxbridge grads for their new recruits but if you want it enough you can get in. Ultimately I generate several millions of pounds a year for my company, something which not many other people can do and for that I get well-rewarded. The hours are long, the work is stressful and intense. My day begins at 6.30am and effectively finishes at 9pm when the US market closes. Family holidays can be cancelled at a minutes notice (I was called back from my honeymoon!!) and even when you're away you have to be in contact with the office on pretty much a daily basis.

Anyone who wants this kind of lifestyle, and the rewards that it brings, is welcome to try but it's simply not something that everyone can cope with. As with anything it's all about supply and demand. If there were 5 million people in the country that could do want I do I'd probably earn 25k a year but there aren't. I don't mean this to sound obnoxious but I liken what I do to Premiership footballers (although I'm nowhere near that talented). The biggest and best teams (banks) want the most prolific strikers (profitable traders) and will pay what it takes to get them. If I can generate $5mln more than the next man am I not worth $1mln of that?

Good post, I fully agree that the work is tough, the hours long, etc.

I worked in the city myself, Oxbridge background, all that stuff, but opted to return to academia and engineering research.

When I left the city, it wasn't clear that the salary differentials would be so huge. I am involved in VC funded companies, etc, and do well, but the city salaries really are very out of kilter with industry.

I often wonder why the city is so widely out of step... A rule of thumb in my industry area is that a company that is doing poorly turns over (per annum) $100k dollars per employee, a company doing well $200k per employee, and a stellar performer $300k per employee. From your post, and my experience, it seems that the city does >$1m per employee? Hence salaries can be vastly greater. I have no problem with the high salaries given the high earning, the key question is "Why can city banks make such vast profits?"

It looks as though there are excess and abnormal profits to be had. The reasons for that might have something to do with government regulation - it is difficult for a Taiwanese or Chinese bank to come in with a lower cost product - as would happen in, say, semiconductors.

It also has to do with a lack of understanding of what is happening in the city on the part of politicians and the wider population. My guess is that few government ministers understand the schemes that have been dreamt up for re-packaging debt, and that the regulation is woefully inadequate.

My fear is that Britain will suffer whenever the current bull market finally falls to bits. My suspicion is that Germany and Japan will be fine when it all goes wrong, after all, I only seem to buy German sourced white goods, car electricals, etc...

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Did you ever know a butcher to go short of meat, or a greengrocer to go short of peas and cabbages?

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your pay reflects your contribution to the company you work for

I used to work in the city and can't totally agree with that. Your pay is relative to what other people in the company and the industry are getting. But the City pay is in no way related to the effort or intellect put into the job. I used to call it Granny's Money and watched just about everyone in the organizations throw it around as if it was their right. To experience it, buy your own house (one of these days) and then see how much you spend on the house-warming party. When the amounts are large, the small percentages lost to things like bonuses is irrelevant. But that doesn't mean that the people getting bonuses did any more work or were any more intelligent than, say, an electrical engineer (30K) or a teacher or a policeman.

But individuals throw the money at the institutions and they throw the money into the markets. The huge amounts creamed by the City muppets is a small fraction of that.

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