The Fed wants to corral the risks that banks take. Too many high-flying bets on sketchy mortgages and financial products that no one really understood got banks into a heap of trouble. So to encourage smarter and less risky practices, the Fed has proposed compensation limits on not only the high-paid executives but also the traders, loan officers and other employees at banks across the U.S.
Good luck. As several analysts have pointed out, limiting bonuses will simply drive the successful players to start their own (unregulated) firms or partner with other non-bank institutions.
The Proof is in the Professions
I have a better idea: why not hire more women? Many studies have shown that women tend to be more risk averse than men. Recent research [1] shows that testosterone is to blame. The higher the amount of testosterone, the more willing people are to take risks. Women, with considerably less of the male hormone coursing through their bodies, are more risk averse. Even women facing death are more risk averse than men in the same situation [2]. Women also, apparently, make better money managers according to another study by two professors at UC Davis [3]. That study found that overconfidence caused men to trade stocks 45 percent more often than women, thus lowering their net portfolio returns by 2.65 percent per year (compared with 1.72 percent lower returns for women traders).
Moreover, several studies show a link between profit and gender. Companies with several high-ranking women at either officer or director levels tend to have higher earnings per share, return on equity and stock prices than competitors with few or no senior women. Look at some of the more stunning losses incurred at banks in recent years: Barings, Société Générale and UBS. All were caused by men betting with other people's money.
In fact, reducing the total compensation of the banking sector might result in more women in those jobs anyway. History shows that occupations that were once predominantly staffed by men (bank teller, waiter, telephone operator, secretary, school teacher) and paid a decent wage became "feminized" while pay has correspondingly dropped. In 1870, women comprised only 2 percent of bookkeepers, cashiers and accountants and a mere 4 percent of stenographers and typists. Today, these jobs are almost entirely staffed by women. What caused this shift? Employers wanting to reduce costs hired more of the "less desirable" workers (women), which freed men up to go after the more lucrative and interesting jobs that came on line as a result of the shift from a manufacturing to a service economy. Employers were further able to keep wages down by enforcing a marriage ban: women who married were forced to resign. Thus, the employer could replace her with a less experienced and lower cost single woman.
Banking on Women
But what is the cause and effect? If a previously male-dominated profession becomes female-dominated, does the total compensation automatically drop? Or conversely, if the total compensation of a profession is forced downward, is that job now less attractive to men and more available to women? One study(4) says not so. In reviewing data from 1983-2001, the researchers found limited evidence that feminization of an occupation causes reduced pay, and no evidence that reducing compensation causes an occupation to feminize. Perhaps 18 years isn't long enough to see any long-term trends. After all, it took more than 100 years for the secretarial profession to flip from 96 percent men to 96 percent women.
Either way, I believe more feminization of the banking sector will lead to more prudent risk taking, and maybe even higher returns. And that would be a very good turn of events for all.
Notes:
(1) "Gender differences in financial risk aversion and career choices are affected by testosterone" by Paola Sapienza, Luigi Zingales and Dario Maestripieri. Published in the Proceedings of the National Academy of Sciences, September 8, 2009, vol. 106, no. 36.
(2) "Are women less risk averse than men? The effect of impending death on risk-taking behavior" by Valérie Harrant and Nicolas G. Vaillant. Published in Evolution and Human Behavior, Vol. 29, no. 6, pp. 396-401. November 2008.
(3) Brad Barber and Terrance Odean, "Boys will be Boys: Gender, Overconfidence, and Common Stock Investment." Published in The Quarterly Journal of Economics, February 2001.
(4) "Does bad pay cause occupations to feminize, Does feminization reduce pay, and How can we tell with longitudinal data?" by Paula England, Paul Allison and Yuxiao Wu. Published in Social Science Research, 36 (2007), pp. 1237-1256.