Curbing excessive pay

Executive pay is in the spotlight again. This week has seen shareholder revolts against the pay packages of senior executives at GlaxoSmithKline and Shell. HSBC is facing similar unrest at its AGM next week as PIRC, the corporate governance research body, has advised shareholders to vote against the bank’s remuneration proposals.

The BBC’s Robert Peston comments on UBS’s fire-sale of its sub-prime mortgage debt, noting that the bank had to lend the buyers three quarters of the sale price just to persuade them to buy the rotten debt. As he says:

UBS has suffered a genuine, eye-wateringly large loss on the sale of assets it should never have accumulated, but is remaining exposed to those assets to the tune of $11.25bn.

As I write, my brain can’t quite come to terms with the extraordinary financial implications of all this.

In his view, much of the blame for the sub-prime disaster is down to the excessive rewards paid to bankers, which encouraged them to take on bad debt for other people but at minimal risk to themselves.

According to Mr Peston, the FSA is considering forcing banks that pay what it considers to be excessive bonuses to hold additional capital as insurance against the incresed risk. It’s an interesting idea and, as he says, shareholders may need just this sort of nudge to persuade them to pressure bank bosses in the way that investors at GSK and Shell have.  

Another interesting idea came from Germany’s Social Democtratic Party. It has proposed a cap on the pay costs that companies can set off against tax at 1 million euros, about £800k, per executive. Therefore, companies would have to pay tax on that money before handing it over to their executives.

Such a move would certainly concentrate minds. If, as we are so often told, these executives are really worth all the money they are paid, then the banks would surely still joyfully hand over the cash to their stars, even after they had paid tax on it. Or maybe the shareholders would have a bit more to say if all that cash came straight out of profits. 

Of course, the chances of something like that being implemented in the UK are extremely remote. However, as I’ve said before, the banks have landed all of us in a mess and they should be made to feel some pain as a result. They should not be allowed to demand state intervention when things go wrong while, at the same time, expecting to escape regulation. Some of that pain should be felt in the wallets of the people who made all those disastrous investment decisions with other people’s money.

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