Mr Darling has now said in an interview that he will consider legislating to control excessive pay and bonuses for banks. He will find that is not easy when he turns to his advisers.
We first need to know what the problem is, then ask how do you fix it? There are three political problems that need examining to do with bankers pay:
1. Many of us find it unacceptable that senior executives working in loss making state controlled business are being paid mega bucks out of our money. Why is Stephen Hester being offered a £9 million package, when there would be someone good out there who would do it for one tenth of that sum and still be well paid?
2. I also agree with George Osborne that someone senior working for a bank not controlled by the government could be offered mega bucks for taking extreme risks, only for the bank to seek a government guarantee or other assistance if they get it wrong. That too must of us find unacceptable.
3. There is the fact that many people throughout the financial world do receive high basic pay and bonuses. If they get it right their firms earn mega bucks. If they get it wrong their shareholders, who have the power to hire and fire, have to pay up. I cannot see any problem with such generous remuneration if the shareholders think it makes sense for them and pay the bills if it goes wrong. Some in Labour love the politics of jealousy and want to stop all such high pay to the private sector, though they usually think footballers are an exception they do not wish to meddle with even where the footballers wages help drive the club into bankruptcy. They judge the public’s jealousy levels well, as the public is more jealous of bankers than of footballers who sometimes entertain and wow them. They probably think TV “stars” are also an exception, though it may have been taken too far in the case of Mr Ross.
The easiest way to tackle type One excessive pay is for the government as majority shareholder to refuse to sign contracts containing such payments. They should call in all the top executives of their heavy loss makers, and negotiate a new deal with them, deferring or cancelling bonuses until their banks are genuinely profit making and have provided for or sorted out all the loss making activities these executives have helped build up in recent years. These new contracts should be a condition of taxpayer support. They should be made to pay for what they have done wrong in the past by forgoing the bonuses they think they have earned. They should not be allowed to dump all the unprofitable business on the taxpayer and carry on as if nothing had happened.
Type two excessive bonuses are also best tackled in this way. There should be a general statement of government policy, that if any bank gets into trouble in future and needs taxpayer guarantees or cash, it will automatically trigger a retrospective revision of all senior executive contracts with a view to cost cutting as a contribution to sorting out the bank’s cash and profit problems. The Regulator can go further and say that in cases where they judge that large institutions that could cause damage to the system are offering excessive remuneration for excessive risk, they will require the institutions to carry more capital to undertake such business. Shareholders will then see that their generous remuneration policy imposes a further penalty on them in the form of lower returns on capital and the need to put up more money.
Those who think we need to tackle Type Three excessive remuneration by changing the law have to answer the following questions:
1. How do you define an excessive bonus?
2. How do you stop them simply increasing the basic pay so the total package remains the same, whilst the bonus element is reduced to the new legal ceiling?
3. How do you stop them employing their top people offshore, or switching the HQ to a jurisdiction where these new rules do not apply?
4. If your target is the guaranteed bonus ( a bizarre concept which has become necessary in some cases to hire good people who would otherwise lose out from moving), how again do you stop them calling it something else – like a “hiring premium” or “relocation package”
5. How can you judge in advance what is excessive risk? The law might prevent hiring deal makers , salesmen or dealers on low or no basic pay who make all their money out of activity. Yet this is a lower risk way of paying them, as it depends on them generating revenue to earn well.
6. How do you avoid other financial centres using this proposed new law as a good argument to financial institutions to leave London and go somewhere else altogether?
7. How can you exclude the footballers and media stars you like from the prohibition on high pay? If you don’t bankers could sign up to a well paid contract to appear occasionally on business TV, with a less well paid contract to do some banking as part of the mix!