Why does Wall Street pay so much?

A recent study by two British economics professors found that, on average, people who work in finance make 48% more than the rest of us. The study focused on workers in London’s financial district. But if you work in New York or near any other financial center, the anecdotal evidence will tell you that the professors’ stat is probably correct. And the interesting thing about the study is it’s not just the M&A investment bankers who get more. Everyone on Wall Street makes more. Even the secretaries on Wall Street get nearly 50% more. In the word of professors Joanne Lindley and Steven McIntosh, the pay premium in finance is “robust.”

The professors say this is because of lax regulation. By taking advantage of the rest of us, banks are able to earn more then they should, so they can pay their workers more. But regulation is far more intense since the financial crisis. And yet the gap seems as large as ever.

The divide is more than just about the actual number. Ask a Wall Streeter why they get paid so much, and you are likely to hear about the long hours of the job and the stress. Not to the mention that they could have chosen to do any number of emotionally fulfilling jobs-social worker, teacher, public defender-but instead they decided to spend their days trying to make as much money as possible for a bank, which is stressful, and will put you in contact with people like Bill Gross, who yell and sometimes send nasty emails.

“There’s the pressure, and the long hours and the lack of job security when you work in the market,” says Alan Johnson, one of Wall Street’s leading pay consultants. “Ask the typical Wall Streeter what they think and they will say that they are not paid commensurate with what they put in.”

In short, it’s not that Wall Streeters think they get rewarded for their hard work. Most of them think they are not paid enough.

There are really two questions here. First: Do Wall Streeters make a lot of money? 100% yes. The other, harder question: Do Wall Streeters get paid too much? Well, that’s a different question.

Right now, Goldman Sachs (GS) has an expected earnings yield (earnings-to-price) of about 9% for this year. That’s roughly what investors are looking to get paid when they invest in Goldman. Yet the bank’s actual return on equity-how much money is it actually producing on the money invested in the company-is nearly 11%. Goldman should pay its bankers more! But check out Wal-Mart (WMT). It has an earnings yield of 6%, and an ROE of 22%. Wal-Mart could really afford to pay its workers more.

I have argued in the past that the Wall Street versus Main Street pay gap that everyone blames on greedy bankers may have less to do with the fact that financiers are overpaid and more to do with companies in the rest of the economy being overly stingy. We saw that in the jobs numbers again on Friday. Despite the fact that the unemployment rate is the lowest it has been in seven years, wages have barely risen since the start of the recovery.

When I have asked activist hedge fund managers or Wall Street bankers who have never worked a day of their life outside of finance why they think they can walk in and tell a CEO who has spent their entire career at their company or in one industry, how to run their business they say, “We know how to allocate capital.” It’s such a common response that I always assumed it was BS.

But maybe there’s something to that. Corporate America spends more and more of its resources every year rewarding shareholders. Happy shareholders means you can raise more capital. But what if you don’t really need capital, or less than you used to. In a service and technology driven economy — which is inherently less capital intensive — it makes sense that a company should devote more of its money toward its workers. Wall Street got that a long time ago, and that’s why Wall Street and Wall Streeters have done better than the rest of us (excluding the financial crisis of course). Until the rest of corporate America also gets that, the Wall Street versus Main Street pay gap is never going to shrink.