Government Strikes Again

A recent CNN article states that:


many top traders and bankers have left the financial giants [Citigroup and Bank of America] for rivals. The trend may continue as long as Citigroup and Bank of America remain under the government’s thumb.


By restricting bonus payments, the federal government successfully prevented these two companies from directly rewarding its most productive employees. It is not a surprise that many of the more talented workers have opted to leave these firms for:


similar jobs at private equity giant Blackstone Group, Germany’s Deutsche Bank and the boutique research shop Ladenburg Thalmann.


The AP reported two days ago that Citigroup has responded by:


increasing the base salaries of many of its employees – reportedly by as much as 50 percent for some workers – as it restructures its compensation program amid new restrictions on bonus payments.


Citigroup decided to sidestep the regulation by raising base salaries.


Essentially, the new regulation prohibits the most efficient outcome (rewarding the best employees through bonuses based on performance) leading Citigroup to institute a less efficient policy. Greater efficiency leads to faster economic growth, which benefits everyone in the long run.