At the heart of the debate over bankers’ salaries and bonuses is a major issue. There is a yawning gap between the logical and moral arguments for maintaining restrictions.
Treasury Secretary Paschal Donohoe wants to ease restrictions on both bank bonuses and salary caps for executives based on recommendations from his department’s banking audit.
The logical financial argument is quite simple. Banks that have been bailed out and are still majority state-owned should not be hampered by restrictions that make it difficult for them to attract the best people.
Having the best people do the best work will increase the value of the state’s involvement and give AIB and PTSB a better chance of repaying any taxpayer bailouts.
Why should they be similarly restrained with an executive salary cap that restricts the CEO to a salary of €500,000 per year when such restrictions do not apply to their unsaved private sector counterparts at other banks?
When it comes to these banks, investors’ share registers are hardly the same today as they were at the time of the 2008 bank collapse. Top management isn’t the same. The board members aren’t the same anymore and many of the staff have probably moved on, not that it was primarily their fault.
If banks are properly regulated and have independent, functioning boards, the financial logic says they should be left alone to continue their business within the confines that the regulations and their boards allow.
It is also difficult for the state to sell more stakes in these banks to retail investors when the restrictions could affect their financial performance relative to other banks.
If banks are properly regulated and have independent, functioning boards of directors, financial logic says they should be left alone to go about their business
This is pure, uncomplicated financial logic and common sense argument.
But there’s another side, too, which revolves around moral hazard and the mistakes these very institutions have made in the past, costing taxpayers and customers dearly.
The moral hazard argument is that despite board, investor and board changes, these are still the same organizations that received taxpayer money and haven’t paid it all back yet.
The financial crash has exposed failings in regulatory, banking and political cultures, and bankers simply cannot be able to financially enrich themselves on the back of a bailout.
While important lessons were learned in the aftermath of the financial crash, the ensuing and enduring tracker mortgage scandal shows that banking culture hadn’t really changed enough.
Indeed, if the Tracker mortgage scandal hadn’t happened, there’s every reason to believe that the government would have removed these restrictions a few years ago.
Another argument is that, as far as CEOs are concerned, neither AIB nor PTSB have suffered in any obvious way from the selection they have won with the current salary cap for the top job.
AIB has had several very effective CEOs since the salary cap went into effect, which seems to invalidate the argument that it can’t attract the best to the position. Mind you, they’ve all moved on.
When it comes to navigating our way through this maze of financial logic and moral hazard, there are a few things we need to keep in mind.
First, the salary cap for top managers and the bonus situation are two different things. There are many people working in state-controlled banks who would benefit from the incentives that a bonus structure brings. It could be helpful to keep them in the bank and not lose them to international banks with a presence in Ireland or abroad.
The bonus restrictions were put in place to prevent over-lending. Reckless lending was a prominent feature of the banking boom and bust. However, there is very little evidence that such lending is currently taking place in the market.
Many people making a fraction of €500,000 could be kept in these banks or even in the industry if they could realistically get a performance bonus. With a proper bonus structure, they could do a better job than a worse one. It is the responsibility of banks’ management, boards and regulators to ensure that bonuses do not lead to reckless lending or mis-selling.
The problem with executive salary caps is that the boards of many organizations overpay executives
Alternatively, perhaps the bonus restrictions were introduced as some sort of punishment for the costly mistakes of the past that took place more than 14 years ago. If that’s the case, many employees have left or retired, and 14 years is quite a long stretch.
The problem with executive salary caps is that the boards of many organizations overpay executives. We’ve seen senior bankers pay millions in banks across Europe and the US just to mess up the job completely.
Supine boards are endemic to many large corporations.
The banking industry more than wiped out its textbook with the financial crash. The Tracker mortgage scandal showed that a later group of bankers and board members chose to collectively interpret the rules throughout the system to favor banks over their customers.
A lot has improved and lessons learned, but will it stay that way until next time?
I remember speaking to a former non-executive director of a bailed bank who told me that when massive loan applications came before the board during the boom, they never once violated bank rules or central bank guidelines in approving them . But the bank had to be rescued in the billions.
I remember recently speaking to a former non-executive at a bailed out bank who said they would never understand how someone who didn’t have a tracker mortgage during the boom should be entitled to one or compensation now. This came despite independent experts including the central bank concluding that customers who were not presented with all available mortgage options should be compensated.
Paschal Donohoe is right about continuing things from the past. But it should only be done together with the banks showing that they have also evolved.
https://www.independent.ie/business/bankers-beware-case-for-scrapping-pay-caps-still-leaves-a-bitter-taste-42186277.html Attention bankers: pleading for the abolition of the upper salary limit still leaves a bitter aftertaste