Bankers’ pay is the issue that will not go away. And the reason for its staying power is not difficult to comprehend. Just as banks were being saved from collapse, they were paying their staff vast bonuses.
The public view is that bank bonuses are unfair and undeserved. But even if issues of fairness are put to one side, the row has exposed a failure of market discipline that cannot be explained away. Over the past decade people who owned bank shares would have enjoyed a return of around zero. Over that same period, bankers took home many tens of billions of pounds in bonuses.
As a minister in a Labour Government I am all for workers getting their fair share, but in this case that has been taken to the extreme.
Last week Andrew Haldane, of the Bank of England, gave an important speech on the financial sector. In it he provided a startling statistic. If banks had trimmed 10 per cent from what they paid staff, they would have saved £50 billion in capital in the seven years before the crisis — with plenty left to pay out in bonuses: £50 billion is how much the Government made available to recapitalise the banks in October 2008.
The same is true in the US. Had leading banks not been so inclined to pay cash bonuses in the three years before the crisis, some estimate that they would have saved $118 billion in capital — just over the amount that the US Government expects to lose from its rescue of the financial system.
Against this backdrop, a number of bank investors around the world are pressing for change. I have met dozens who feel that a push is needed from bank owners to redress the imbalance between profits, dividends, capital retention and employee pay. I have promised to do what I can to facilitate this action and discussion.
With this in mind, I wrote recently to the chief investment officers at leading fund management firms. As a representative of a significant owner of UK banks, the British taxpayer, I wanted to set out my views on what drove bank profits in 2009 and what that might mean for staff bonuses.
In my view, bank profits have been driven significantly by the vast amount of government and central bank support since the crisis. Shareholders need to discriminate between the fortuitous and the consequences of real talent and skill.
The Government, through United Kingdom Financial Investments, has very publicly insisted on banning discretionary cash bonuses for well-paid staff and demanded full deferral and clawback of bonus awards at Lloyds and RBS.
The point of my recent letter to fund managers was to encourage investors to start talking openly about the similar work that they are doing. The Government is not the only shareholder keen to protect its investments being eroded by unreasonable payouts to bank staff. My letter provoked a degree of criticism from “influential investors”. I suspect the real reason for this was not the substance of the letter.
People in the investment community (including myself for several decades) have never had to deal with significant public scrutiny of our actions. We have not been accustomed to the media asking questions about our decisions, and are certainly not comfortable having our roles examined on the front pages, as they have been on bonuses.
But too many of us failed to act as good stewards of our clients’ money in relation to remuneration. We have invited public scrutiny of our failures and will now have to explain our actions. That is how it should be — it is time to come out of the shadows.
A minority of fund managers might whinge about the pressure on them to think and behave like owners. But who do they expect to do this if they do not? Surely they do not want the Government to dictate pay and fee policy on their behalf.
The market has failed over bankers’ pay. Some of us think it should be fixed. Those who do not should explain why.
Lord Myners is City Minister and a former fund management chief executive
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