Many of the early reports on the Walker Review suggested that banks were to be forced to publish the pay details of their top earners. In fact the review simply recommends that total remuneration of those paid over the executive board median should be published in bands, indicating the number of executives in each band. So no, you are not going to find out how much your investment banker friends actually rake in.
It must have caused a brief moment of panic among City high-flyers though but not because they would be shamed by having to justify their high earnings. People who have never worked in the City often fail to appreciate the sheer arrogance and the detachment from the rest of the world that prevails among the high earners of the financial world. If you want an insight into the culture, read Geraint Anderson’s book. For the purposes of entertainment, his stories are larger than life, but only slightly.
It is said that Millwall supporters invented the catchphrase ‘They don’t like us, we don’t care.’ It could just as well have been investment bankers. Actually, no, that catchphrase implies that even Millwall fans had stopped for a split second to consider what other people thought of them. Not so investment bankers. How they are seen by outsiders never even crosses their minds. Which is why naming and shaming banks about the levels of remuneration they pay is a meaningless gimmick. The people who are supposed to be shamed by this don’t give a toss what anyone else thinks.
No, the reason why the City’s high-earners might briefly have been worried about the disclosure of their pay packets is not because the great unwashed would have found out what they earned, it is because other bankers would have found out what they earned. If I suddenly discover that Giles Farquharson-Smythe at Big Swinging Dick Bank earns a third more than I do, I’m going to be mightily pissed off. But, even worse, I now know that Giles knows that I earn 25% less than he does. How can I show my face at Corney & Barrow again? Until I have rectified the situation, by which I mean demanding an instant pay rise and guaranteed bonus that takes me well above what Giles earns, I’m going to be a social pariah.
The culture in the City is very much like a dick-measuring contest. The pressure for ever increasing pay packages is driven not so much by the desire for money, or the material things it can buy, as by the status that it conveys. People want more and more money not for its own sake but because the more noughts you have next to your name, the higher you are perceived to be in the pecking order. There, more so than anywhere else, a person’s worth is judged purely on what he earns.
Greater transparency will almost certainly curb the abuse of expenses by MPs but the same forces to not apply to investment bankers. MPs care what people think; investment bankers don’t. Naming and shaming and self-regulation will not curb the pay of bankers.
If we are really serious about reining in bankers’ pay, the only way to do it is by regulation. The Walker review’s recommendation that bonuses be deferred for three-to-five years, to allow the results of bankers’ decisions to be judged, will only work if it is a legal requirement and every bank is forced to comply. When Professor Raghuram Rajan suggested deferring bonuses eighteen months ago, investment banker Andrew Clavell remarked:
If one firm broke ranks on compensation structures as Rajan suggests, its employees will vapourise, starting with the best, and the firm will be destroyed. And good luck recruiting at Harvard or INSEAD next year too.
In other words, unless the policy is forced on all banks, those that don’t make people wait for their bonuses will steal the best people from those that do. By extension, this argument applies to the regulatory regimes in different countries. For deferred bonuses to work, the regulations would have to apply in London, Frankfurt, New York and Hong Kong. Fortunately, the financial crisis has created a global consensus that something must be done about bankers’ remuneration so the chances of getting some sort of international regulation in place are greater now than ever.
Of course, none of this will stop bankers earning enormous amounts of money. Even if they have to wait three years for part of their bonuses, the amounts they take home will still be beyond the imagination of most people. The proposals in the Walker Review are designed to discourage excessive risk taking not to stop bankers earning shedloads of cash.
However, if we want to punish the bankers for getting us into such a financial mess, which is the tone set by many articles and letters to newspapers, then the only way to do that is to take their money away from using punitive tax rates, something which might not get quite the same level of international consensus.
As long as capitalism exists in its current form, which is likely to be for the foreseeable future, bankers are going to earn a lot of money. We may hate them for it, and for being so arrogant about it, but it isn’t going to change. Regulating their pay to discourage excessive risk is one tool among many which might help prevent a repeat of the financial crisis we have just witnessed but, even after that, they will still be considerably richer than you.