The financial breakdown of 2008 was caused by a variety of factors from collateralized debt obligations to extreme speculation by financial firms. One area of interest is the pay models at financial firms and how they ended up promoting risk taking and how it’s shaping expectations today.

The de facto practice in the financial world was to reward employees for making bets and compensating them for portfolio market values that only sky-rocketed north. The formula was simple, work hard to generate money for the firm and you will reap a tremendous reward. Working banker hours has been synonymous for not leaving the office till 2AM and sacrificing your weekends. Their labor amounted to a financial sector that boomed:

From 1990 to 2006, the GDP share of the financial sector in the broad sense increased in the United States from 23% to 31%, or by 8 percentage points. The figures on profits are even more striking. For example, the financial services industry’s share of corporate profits in the United States was around 10% in the early 1980s but peaked at 40% last year.

And according to the New York Times, bonuses hit a record high of $38 billion dollars in 2006.

While that was the rosey past, things have changed: Wall Street bonuses dropped 44% in 2008; CDOs became worthless; banks constricted lending; and the business viability of once-strong American companies weakened.

Right now White House officials and the Treasury Department are debating a $100 million dollar question of paying a Citigroup executive for his energy trading team’s performance last year. If they don’t pay him, they are afraid he will leave.

The incentive system that was setup during a booming time has created the expectation of individual rewards. The odd thing is, that hardly exists in other fields. In other fields there is an understanding of company-wide accountability. My background is from tech, and if your company is doing well you receive pay-raises, bonuses, and rewards. If your company is under heat, you cut back and fight it out together during the tough times.

If you are on the team that invents a new chip or device that is going to revolutionize an industry and you work for a giant like Intel or Apple, you will be compensated well, but not exorbitantly. Why? Because your company is a vehicle for your success. Without the resources like Intel’s state-of-the-art fabrication plants or Apple’s rocking brand, your product wouldn’t have its growth potential.

The equivalence in the financial sector is the sheer amount of money that financial firms have at their disposal to make returns on.  A talented trader may make 20% returns on a $100M to generate the company $20M. But imagine if they were on their own investing $1000, they’d only walk home with $200 bucks.

So where do the large rewards come from? It’s when you create your own hot start-up or investment fund. Because you take those risks yourself, you reap the returns.