You Wouldn't Cry Too If It Happened To You

Read through the comments on any blog post about AIG bonuses, Rahm Emmanuel's Fredie Mac gig, or any other aspect touching the high pay in Finance, and you will see that on both sides of the political spectrum, there is an underlying disbelief and disgust that anyone could possibly justifiably earn these large amounts ($1M/year). Now, I am not going to argue that specific people earned their dough, but it irks me that so many people refuse to consider the possibility.

In one of his books Nassim Taleb recounts the advice he was given when selecting a career path, "pick something that scales." Burger flippers, bus drivers, auto assemblers and scientists can only earn so much with their 40 hours a week (even with steady raises and some overtime). With luck they will get relatively wealthier over time and retire nicely, but they will never get rich via their day jobs without a lawsuit being involved. Doctors, dentists, accountants, engineers, plumbers and the like can make a nice living billing a few hundred dollars an hour, but there are only so many hours in a week, and after expenses and long hours these professionals can themselves only expect to earn a comfortable, but not super-rich, low- to mid-six figures.

To get truly rich in these jobs you need to be able to leverage your time. This can be done either by taking a cut of other peoples time (dental practice with technicians, plumber with assistants, engineer as partner in a firm). As you add more and more people underneath you, you can get good and rich. However, at this point you are making your money as an entrepreneur not as a doctor, dentist, etc. To a large extent, this is how high-level managers earn their keep too (and explains part of why executive pay has grown as a ratio to median pay as organizations get bigger).

The other way to get rich through your job is to work with a lot of money. This often translates to a lot of other people's money. If you make decisions that add and subtract significantly to the value of $100M transactions on a regular basis, your employer has incentive to pay someone to do a good job in your role. If you give them reason to thing you (will) do a good job, they will be willing to pay you for a portion of the value you add. Again, I'm not saying that everyone deserves what they get, just that it's possible to deserve that much. When you are structuring a $100M deal and you are able to turn it into a $110M deal, or even just eliminating $20M of risk, you are doing the equivalent of flipping a lot of burgers (or performing a lot of root canals).

Now, due to the declining marginal utility of money, you have to keep paying the good people more to stay. Rahm Emmanuel made $16M in his first few years on Wall Street. If you won $16M in the lottery tonight, how easy would it be for your employer to keep you on? Would you stay for your current salary? What if they doubled it? What if they quadrupled it and said you only have to work 1 day a week? You might be willing to do a few hours of work over 14 monthsfor $20K and a bunch of stock options (again, I'm not arguing that Rahm did a good job or was worth it, just that it would be reasonable for him to require that level of motivation for that level of work).

Even without 7 figure bonuses, as the returns on folk's savings approach and exceed their annual income, a significant focus will shift from the day job to the investment portfolio. Anyone who works in an office environment will have noticed that prudent and responsible mid-forties professionals with ~$1M+ net worth and low-six-figure incomes spend a lot of time staring at their brokerage in that Internet Explorer window that's always hiding behind their TPS report (if not permanently plastered on their second monitor).