The Best Bankers Must Be Paid to Stay

Despite the uproar over bonus payments at taxpayer-supported firms like American International Group (AIG Quote) and Merrill Lynch, a simple fact stands in the way of limiting bankers' salaries: The best and the brightest must be paid to stay.

Now that populist rage has died down, with the help of regulators who realized its counterproductivity, banks are taking a stand to keep their top talent from fleeing into the arms of foreign firms, and less regulated competitors like hedge funds, private equity firms and private institutions.

A report in the Financial Times on Sunday reported that some big beneficiaries of government support, including Merrill, Citigroup (C Quote), Morgan Stanley (MS Quote) and UBS (UBS Quote), are increasing pay packages to halt the mass exodus that started to take place. The paper quoted a source saying that UBS and Merrill had lost about 25% of top talent to strong foreign competitors like Barclays (BCS Quote), Credit Suisse (CS Quote) and Deutsche Bank (DB Quote), which didn't face as stringent regulations or harsh scrutiny on executive compensation.

Another anonymous source at one of the expanding banks said offers had been as high as 80% of peak pay packages in 2007, despite the market's downturn.

The change in both action and tone marks a turning point in the financial sector's recovery process.

So far, with each "bonus scandal," the plot has moved in this order: Bonus payments hit headlines; taxpayers bristle at unfairness, given rising unemployment; and lawmakers get up in arms, haul executives like AIG's Edward Liddy or BofA CEO Ken Lewis before congressional committees, fueling the fire. BofA, one of the largest bank recipients of federal aid, acquired Merrill at the start of the year, making Lewis the person who answers to any Merrill-related shenanigans.