Curbing bankers’ pay

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.

This entry was posted in Uncategorized. Bookmark the permalink.

9 Responses to Curbing bankers’ pay

  1. jameshigham says:

    Even Millwall fans had stopped for a split second to consider what other people thought of them. Not so investment bankers.

    Not all, Rick. One of our Bloghounders is an investment banker and he has his own opinions about many of his colleagues.

  2. Rick says:

    If you mean Wolfie, I’m happy to make an exception in his case. He’s one of the good guys.

    I am, of course, generalising in this post. Not all investment bakers are selfish gits but the overall culture is one of selfish-gitdom. If you see what I mean.

  3. john b says:

    Bear Stearns bonuses were paid in stock, and the company was 50% employee-owned. This doesn’t seem to have affected behaviour overmuch…

    • Rick says:

      Good point John. I think pay is probably a side issue in all of this. Even if Walker’s suggestions on pay were implemented, that would not be enough on its own to prevent another financial crisis.

      People are angry about bankers’ bonuses but the focus of regulation should be to insure the taxpayer against future bank collapses, not to stop bankers getting rich again.

      That will be the subject of another post when I have time.

  4. Ruth@VS says:

    Very true – many people in the City use pay as a measuring stick, and that is not going to change. When they were recruited after university, the big pay cheques were dangled in front of them, so it’s what they expect and indeed one of the reasons they went into the work. The only people who can influence it are the shareholders, and they have little power/interest in reality as most of them are big corporations who pay lots of money to themselves as well.

    The free market means that very high pay and bonuses will never disappear – but the fact the government has propped up the banks with public money makes it worse. They took away the only possible punishment for misbehaviour – the collapse of the company itself due to the high earners’ decisions. Now there is really no incentive to consider pay properly.

  5. Luis Enrique says:

    If profits = revenue – costs, and costs largely consist of employee compensation, how does campaigning for lower bonuses/salaries differ from campaigning for higher bank profits? Do we know that revenues will fall if bonuses do?

    As far as I can see, this whole focus on bonuses/salaries is entirely wrong-headed – the point is to stop banks making money from risky / otherwise anti-social activity in the first place – worrying about how they then divide up the money between profits and wages, and the wage structure they choose to do it, is of secondary importance. Yes bonuses give employees incentives to engage in risky activity, but profits give banks incentives to engage in risky activity …. if you somehow engineer a reduction in bonuses/salaries, you could increase profits and give banks even larger incentives to indulge in bad behavior.

  6. Mark says:

    You neglect the point that bonus culture encourages:

    1. Smoke and mirrors accounting to inflate paper profits in the period in which bonus figures will crystallise.

    2. Excessive leverage as loans are taken to pay the bonuses and dividends linked to the mysterious ‘no cash reported profits’.

    3. Continued incentive to load the regulatory game in favour of smoke and mirror accounting.

    Human laws (including accounting rules) can only be bent as far as they clash with the immutable laws of nature. And then you have your nose broken.

    Fuck the bankers; hide your silver.

  7. euandus says:

    How about relying not only on regulations, but also considering Paul Volcker’s advice from experience: being too big is itself a problem that can and should be remedied? I’ve just posted on it at http://euandus3.wordpress.com/2009/10/25/bigger-banks-too-big-to-fail/

  8. Pingback: Tweets that mention Curbing bankers’ pay | Flip Chart Fairy Tales -- Topsy.com

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s