EDITOR'S TAKE: When management award themselves massive pay increases

If one thing was clarified by last week's Financial Crisis Enquiry Commission report, it's that, given the option, most bankers will maximise their pay - regardless of the consequences.

Hence, we had Joe Cassano, the head of AIG Financial Products, paying himself no less than $38m a year, annually, between 2002 and 2007 - despite sowing the seeds of the parent company's future ruin. And we had traders earning massive bonuses for little more than warehousing the CDOs that would later generate huge losses.

Contrary to popular prejudice, the urge to maximise compensation isn't restricted to the investment banking profession.

British MPs have been prone to voting themselves pay increases. And last year, the European Parliament allocated its MEPs 91k in tax free 'subsistence' expenses, with no need to provide any evidence of what they're spending that money on.

However, senior members of the banking profession may be more prone to compensation maximisation than others. As Nicholas Taleb points out, in financial markets in particular, there's a tendency to mistake luck for skill and to pay oneself accordingly.

Neither luck nor skill appear to have played a part in the latest pay rises at Goldman Sachs. As Breaking Views remarks today, Lloyd Blankfein has received a massive increase, despite presiding over a 33% reduction in net income and a halving of the firm's return on equity.

Blankfein isn't alone in getting a rise. Goldman's partners have also been given a boost: the Wall Street Journal reports that all 470 are getting their salaries hiked. Blankfein's salary, meanwhile, has tripled. This coincides with a 17% reduction in pay per head across the firm as a whole.

Back in 2009, Goldman went to significant lengths to justify its compensation, with graphical accounts demonstrating that pay was linked to performance and that both increased in lock-step.

Now that pay's increasing and performance isn't, the perception is that Goldman's senior executives are paying themselves regardless.

Pay bias may not be restricted to Goldman: back and middle office staff are allegedly suffering disproportionately in the bonus round at Morgan Stanley; the suspicion has to be that front office staff took most of the pot.

Paying for performance is one thing; paying for position in the internal hierarchy is another. Too much of the latter breeds resentment and Machiavellian scheming. Banks which go down this route now may come to regret it later.