The puzzle, of course, is why the supply of investment banking doesn’t expand so as to lower price and thus wages, in what appears to be a fairly competitive industry.
My take: The high payments solve an agency problem and align interests, and thus they are relatively invariant to competitive pressures. If Goldman does an IPO, the issuing company wants to make sure that Goldman promotes the issue properly. This means, among other things, that Goldman eschews pure market-clearing prices and instead places the issue in the hands of investors who will talk it up and promote it. For this to happen, Goldman has to care more about its relationship with the hiring, security-issuing firm than about some of its external relationships, namely other groups which would like to buy into the offering at favorable prices but which would not promote it as effectively (NB: this is not the only relevant conflict of interest problem, it is just an example).
In other words, the company doing the IPO has to pay Goldman lots to ensure their loyalty.
Competition for doing IPOs won’t much lower the required payments needed to capture the loyalty of Goldman. There could be one million talented investment bankers bidding to do that issue, and ex post the security-issuing firm will still pay the winner large sums to align incentives in the desired manner.