“Hold-up” in Finance : The Conditions of Possibility for High Bonuses in the Financial Industry
Pay in the financial industry can be very high, and understanding how it gets determined is a key to understanding the wage labor nexus. The fact that some employees acquire “hold-up” power is more relevant in explaining this phenomenon than the idea of optimal effort incentives. To better understand the mechanism, an exemplary case of hold-up is studied : two heads of a trading room in a major French bank were granted bonuses of €10 million and €7 million respectively for the year 2000 by credibly threatening to leave for a rival bank with their entire teams. The hold-up mechanism can be outlined on the basis of this case : having control over transferable assets makes it possible for employees to threaten to inflict damage on a company if it refuses to accept a contract renegotiation that is favorable to the employee. The hold-up mechanism is particularly likely to operate if protections against it are weak or ineffective. This leads to viewing the financial industry job market differently, less as a market of persons and personal skills than a market for company assets produced and carried by persons who organize their transfer.