Will Pay Caps Spur an Investment Banking Brain Drain?

The argument for giant bonuses has always been that top CEOs and other executives are so crucial to their companies, that to penny-pinch on compensation would scare away the best talent.

That theory is being sorely tested in light of the failure of so many executives to manage risk effectively for their firms in the past two years. A lot of executives turned a blind eye to foolish and risky investments, while raking in big bonuses for themselves.

Wall Street legend John H. Gutfreund, who ran Solomon Brothers during the 1980s, says all the grumbling about executive pay caps is just sour grapes. In an article in the New York Times online, Gutfreund is quoted as saying “people got spoiled” during the boom times. People got used to monster pay packages when times were good. The financial industry grew at a much faster clip than the rest of the economy. Now, as everything contracts, bankers may just have to set their sights a bit lower for a while.

Especially now, in what is clearly a “buyer’s market” for investment banking talent. There is much less chance that a disgruntled Master of the Universe will up and leave with so few places to go. Some may hunt for a new job at hedge funds, corporate buyout shops, boutique banks and start-up companies. Others are looking at overseas markets for pockets of opportunity.

Nevertheless, recruiters say that the most talented investment bankers, described in the article as “the driven, hyper-numerate, slightly ruthless ones with a preternatural knack for making money in bull markets and bear,” will always be in demand and ready to jump ship for the highest bidder.

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