Excessive pay – make shareholders take the full hit

Most commentators are decidedly underwhelmed by the recommendations of the Walker Review. Most of the attention has been focussed on bankers’ pay and, specifically, the decision not to force banks to publish the names of staff being paid over £1 million in a given year. George Osborne has accused the government of running scared by back-tracking on this proposal but, while it might have played to the gallery of public opinion, it would have made very little difference to the bankers’ massive pay packets.

Naming and shaming only works if those being named will feel ashamed by the revelations. Money isn’t something bankers feel ashamed about. As I said last summer, when this proposal was originally suggested, publishing pay levels will only increase the demands for more pay. That’s just as likely to happen even if individuals are not named. Investment bankers are competitive about most things but they are especially competitive about pay. The City is a small world and people will soon work out who is who and what they are earning.

So, given that naming and not shaming will have no effect whatsoever on bankers’ remuneration what sort of measures could be taken to curb excessive pay?

One idea that I’m surprised has not gained more traction was that floated by Germany’s Social Democratic Party over a year ago.

Like all businesses, banks offset the cost of salary and bonus payments against their tax liabilities. Under this proposal, only remuneration up to a given level for each individual could be classed as an operating cost for tax purposes. Anything above that would have to be funded from the bank’s profits. The SPD suggested €1 million, which would be around £900,000 at today’s prices. Therefore, if a bank’s shareholders, through their remuneration committee, really think that Giles Farquharson-Smythe is worth more than £900,000 then they must fund the difference out of their own pockets.

This would certainly test that investor activism which David Walker insists is crucial to the good governance of the banks. If excessive salaries were to be paid directly from profits it might focus shareholders’ minds on the extent to which their highly paid staff are actually worth all that money. On the other hand, it might not. Shareholders might be happy to hand more of their cash to the people they consider to be stars but at least the rest of us wouldn’t be giving them tax relief on it.

A measure such as this would also ensure that organisations which paid people high salaries would pay more tax. Given that it was these very institutions that caused the financial crisis it is only right that they should cover more of the tax increases that will be needed to pay for it.

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