The FT’s John Gapper wades into the debate over bankers’ pay in a Thursday comment piece – shockingly enough, in their defence. Brave man.
There have been several calls for the regulation/restructuring of remuneration in the financial sector, with the general consensus being that bankers are not motivated to produce long term results.
They are accused not only of wasting shareholders’ money by taking excessive risks with their banks’ capital (which has now had to be replenished by Asian and Gulf countries) but of precipitating a credit crunch that has already destabilised the US and UK economies.
Let’s not forget, however, that everyone was happy to take a bite out of the complex financial assets apple when prices were all going up.
Raghuram Rajan, of the University of Chicago, argued in January that bankers’ bonuses ought to be clawed back when their trading profits turn out subsequently to have been earned by excessive risk-taking. Martin Wolf then described banking as “virtually the only business able to devastate entire economies“.
Martin’s solution was for regulators to ensure that the bonuses for top managers of banks should be paid in restricted stock redeemable over five or 10 years. He said that this idea was “horrible” but better than doing nothing.
Gapper agrees that banks should employ a clawback mechanism to limit risk-taking by bankers but disagrees with the idea that regulators should intervene on behalf of banks’ shareholders.
Official action would be justified only if investment bankers were the culprits for the world’s economic woes and regulation would do more good than harm. On both of these counts, I doubt it.
Banks can affect economic growth, and may bring about intervention from central banks and are therefore regulated for a reason. However, regulating down to the level of an individual’s pay cheque is a bit of a leap and not really justifiable, says Gapper.
If anything, the people whose individual financial incentives should be forcibly altered are the mortgage brokers who were paid on commission to mis-sell mortgages to people who could not have been expected to keep up the payments. The bankers were dealing with professionals who were trained to know better.
I am even more sceptical about whether regulating bankers’ pay would achieve anything. Most get a chunk of their bonuses in restricted stock. As to trying to impose rules on the pay of people with an arsenal of derivatives, tax wheezes and offshore vehicles up their sleeves, good luck.
Lord knows I suffer from the riches of bankers, like everyone who lives in London or New York alongside them. But the fact they are paid as they are is a matter for individual resentment, not official intervention.