William D. Cohan on Wall Street and Main Street.

For the life of me, I can’t figure out why Wall Street bankers, traders and executives get paid so much money year after year for doing jobs that rarely require them to innovate, enlighten or put their own capital at risk, and have the nasty habit of periodically sinking our economy.

After a two-year stint as a reporter on a daily paper in the early 1980s, I worked on Wall Street for nearly two decades, and quickly discovered that I could make more money in one year as a banker than I could in a lifetime as a journalist. And that was when I was a relatively junior banker. By the time I was a managing director, the pay — and the pay spread — was astronomical.

Hedge fund and private equity managers, like professional athletes, put it all on the line every day. But the big banks pay their employees millions to gamble with other people’s money.

Curiously, though, the amount of time and energy I devoted to the two professions on a daily basis wasn’t all that different; both were totally demanding. While it was true that as a banker I generated revenue, or helped to generate revenue, and as a journalist, the publisher likely figured I was part of a cost problem, the discrepancy in pay never made much sense to me since I always had trouble imagining a newspaper without writers.

Now, after six years of writing about Wall Street — including two lengthy books — I remain at a total loss to explain the pay phenomenon. What’s worse, even the most modest slights when it comes to pay on Wall Street — “The guy next to me got a $2 million bonus, why did I only get $1.9 million?!” — is enough to reduce someone to tears. Indeed, I have yet to encounter a person on Wall Street who can, with a straight face, justify his compensation on other than the most painfully tone-deaf grounds, usually along the lines of how they “add value” for their clients.

The Wall Street Journal recently estimated that Wall Street bonuses in 2010 will total $144 billion, in a year that has been less than stellar for most banks. Goldman Sachs has set aside $13.1 billion in bonuses for its approximately 35,000 employees, an average of $370,000 per person, which completely ignores the fact that people at the top of Goldman’s golden pyramid get paid millions of dollars annually while those at the bottom do not. (In 2007, the three top executives at Goldman split around $200 million.) Goldman’s accrued bonuses for the first nine months of the year equaled 43 percent of its revenue and were down from the $16.7 billion that the firm accrued in 2009, or 47 percent of its revenue. (In a nod to the political gales blowing in its direction, Goldman accrued nothing for bonuses in the final quarter of 2009.)

At Morgan Stanley, half of the $24 billion in revenue the firm has generated in the first nine months of the year has been earmarked for compensation. At Lazard — a somewhat different Wall Street animal, in that it largely limits its actions to asset management and advising on mergers, as opposed to trading for

its own account — 61 percent of the revenue generated so far this year has been set aside for bonuses. And, incredibly, according to the Financial Times, UBS, the giant Swiss bank, has asked Swiss authorities to waive a $1 million bonus cap for its bankers “amid complaints” the cap “has strained some executives’ personal finances.”

Do Wall Street firms exist for the benefit of their shareholders, like other public companies, or do they exist primarily for the benefit of the people who happen to work there? The answer to this rhetorical question is painfully, and sadly, obvious. No other large public companies pay out anywhere near as high a percentage of revenue to their employees. But where is it written that this madness has to continue? Why does a financial engineer have to get paid exponentially more than a real engineer?

With his usual narrative flair, the New Yorker writer Malcolm Gladwell recently tried to figure out why Americans pay their “stars” so much money. “There was a time, not so long ago, when people at the very top of their profession — the talent — did not make a lot of money,” he wrote. That’s true of Wall Street as well: in 1949, when Felix Rohatyn started at Lazard Freres & Co., in New York, he was paid $37.50 a week. This was a 15 percent better weekly salary than Ace Greenberg received that year when he started at Bear Stearns, where he would eventually rise to chief executive and chairman.

As Gladwell explains — thanks to such visionaries as Marvin Miller, the former head of the Major Baseball Players Association, and Mort Janklow, the literary agent — the talent began taking a larger percentage of the pie. The logic evolved, soundly, that those who took the greatest risks or had achieved greatness on a daily basis deserved the bulk of the financial reward, as opposed to those who happened to own the team or the printing press. We may not always like Alex Rodriguez, but most Americans can understand why he got a $275 million, 10-year contract to play baseball; he’s one of the great players of all time, and his talents bring in the crowds (and TV money) to the Yankees.

In finance, the rough equivalent of A-Rod are top private-equity titans, like Steve Schwarzman and Henry Kravis, or hedge-fund managers, like John Paulson and James Simons. These men risk large chunks of their own money (as well as their investors’) and make calculated gambles they hope will pay off. If they bet right, they get fabulously wealthy; if they don’t, they disappear into oblivion. Teddy Forstmann, a onetime star of the private-equity firmament, explained to Gladwell why he chose that business: “I wanted to be a principal and not an agent.” He wanted to be the talent and to be paid like the talent, assuming he performed.

But unlike hedge-fund guys, investment bankers are not principals. They are agents. And they are at their best when they provide important services to their clients — such as advice on mergers and acquisitions or the capital their clients need to grow — and at their worst when they pretend to be principals, using other people’s money to make bets for their firms that they hope will be eventually reflected in their bonuses.

And yet, somewhere along the line, bankers decided that they deserved to get paid like those quantifiable talents who put themselves or their capital at risk day after day. This is what mystifies me, since, as a group, investment bankers are the most personally and professionally risk-averse people I’ve ever met. After all, in what other business could they make so much money without putting any of their own money on the line? Outsized financial rewards should be reserved for those who take outsized financial risks with their own money or have outsized, demonstrable talent. Investment bankers, by and large, just do not make that cut.

At the end of his essay, Gladwell tells the story of how the baseball Hall of Famer Stan Musial, after turning in a batting performance that was 76 points below his career average in 1959, asked the St. Louis Cardinals for a 20 percent pay cut off his $100,000 annual salary. This was a decade before Marvin Miller came and changed the calculus for players. Gladwell concedes that Miller would have been appalled by Musial’s decision. “There wasn’t anything noble about it,” Musial said in explaining why he did it. “I had a lousy year. I didn’t deserve the money.”

Which brings to mind what happened to Felix Rohatyn, at Lazard, when he took the advice of Samuel Bronfman, the Seagram’s magnate, and switched from foreign-exchange trading to Lazard’s mergers-and-acquisition group, where he would go on to become a legend. The moment he made the switch, however, Andre Meyer, Lazard’s senior partner, cut Rohatyn’s annual pay to $10,000, from $15,000. And Rohatyn had not even had a bad year.