A Plateau in Wall Street Compensation?

Have we finally reached the limit of the compensation taken by employees on Wall Street? On the one hand, this report was just released today:

The 2010 Wall Street bonus: $128,530

NEW YORK (CNNMoney) -- Wall Street workers may be feeling a little leaner since cash bonuses fell nearly 8% last year, according to New York State Comptroller Thomas DiNapoli.

But bonuses still averaged more than $120,000. And that doesn't take into account salaries or commissions, which can significantly bump up workers' total compensation packages.

Total bonuses paid to New York City workers in the financial securities industry fell to $20.8 billion in 2010. That's a one-third drop from 2007, before the financial crisis, DiNapoli said.

On the other hand, judging by the stock price of some investment banks, investors are having serious doubts about whether those investment banks are earning enough money to be worth investing in:

The Big Squeeze
Can investment banks make high enough returns on equity to exist?

FOR financiers, closing an investment bank is like parting with a Porsche: life is too dull without it. Yet a cull is needed. Most bulge-bracket firms made billions of dollars of profits in 2010, but not enough to compensate shareholders for the far larger amounts of capital they now have invested.

...[I]nvestors are disappointed by the low ROEs now on offer. Some firms trade at below their book value (see chart), implying they cannot deliver acceptable returns to their owners.

There has been a tremendous shift over the past 25 years or so in the portion of the US economy's resources that have been ending up in the pockets of people who work in the financial industry. Many observers (including me) thought that the secular trend of more and more resources being devoted toward finance (and all of the explicit and unadulterated rent-seeking behavior that much of the financial industry depends on) was going to come to an end with the financial crisis of 2008. But over the last year, that outcome has seemed unclear to me. Actually, I guess it still seems unclear to me.

However, it's one thing for people in Washington and other talking heads to complain about the ridiculous compensation taken by many Wall Street employees. But it's another thing altogether if stock market investors are shying away from investment banks because they see them as insufficiently profitable. Because if that's the case, then there may be (for the first time that I can think of) some serious market pressure to limit Wall Street compensation packages. And if we have indeed finally reached a plateau in the size of the financial sector in the US economy, I see that as a very good thing.