Bankers’ pay and the evolving structure of US banking

Abstract

We consider the determinants of pay in US banks since 1986 using a new structural model in which banking firms are matched in rank order with management teams of varying talent. We calibrate the model to data from US bank holding companies focussing on labor’s share of bank value-added, the level of bankers’ pay and its sensitivity to bank performance. We find that three changes in banking regulation have shaped bankers’ pay in the last three decades: (1) removal of obstacles to interstate banking set off a process of banking consolidation in the 1990s, (2) deregulation at the end of the 1990’s allowing banks to pursue non-interest income has driven a trend toward higher pay and higher incentive pay, (3) tougher regulations following the financial crisis imposing an implicit tax on size and complexity has moderated pay in large banks but in so-doing has allowed smaller banks to take on business outside of standard credit intermediation resulting higher pay in those banks. Taking these structural changes into account we find a tendency over three decades for a decline in labor’s share, in line with superstar effects implied by our structural model.