21 September 2009
Sermon on Lehman Brothers anniversary
This can be found at:
http://sermonsandprayers.blogspot.com/2009/09/business-ethics.html
http://sermonsandprayers.blogspot.com/2009/09/business-ethics.html
Labels: Ethics, Lehman Brothers
06 September 2009
Bankers pay at G20
The FT Lex column (on ft.com) had an article about the G20s efforts to develop international financial regulation. This can be viewed at http://www.ft.com/cms/s/3/e0c5d822-9890-11de-807a-00144feabdc0.html 9Subscription may be required).
In response I wrote to the editor of the FT (not published) as follows:
Dear Sir,
The Lex column is quite wrong to describe the G20's focus on bankers' pay as "populist but often tangential". Bankers' behaviour is driven by pay, and so bankers' pay has to be absolutely central to regulation of behaviour in the financial sector. It is essential that the incentives that arise from pay lead to constructive, value creating behaviours and not to behaviours that undermine the system.
As Lex points out that, "the architects of boomtime credit innovations are returning to their desks, finding new ways to tinker with balance sheets and carve through rules that are still being developed. The regulated are already moving ahead of their minders." Such behaviour could all too easily send us back into crisis, and yet the behaviour arises because of the incentives in bankers pay.
Removing incentives for destructive behaviour from bankers pay is an essential first step before any other new regulation has a chance of succeeding.
Yours faithfully,
The Revd. Patrick Gerard
In response I wrote to the editor of the FT (not published) as follows:
Dear Sir,
The Lex column is quite wrong to describe the G20's focus on bankers' pay as "populist but often tangential". Bankers' behaviour is driven by pay, and so bankers' pay has to be absolutely central to regulation of behaviour in the financial sector. It is essential that the incentives that arise from pay lead to constructive, value creating behaviours and not to behaviours that undermine the system.
As Lex points out that, "the architects of boomtime credit innovations are returning to their desks, finding new ways to tinker with balance sheets and carve through rules that are still being developed. The regulated are already moving ahead of their minders." Such behaviour could all too easily send us back into crisis, and yet the behaviour arises because of the incentives in bankers pay.
Removing incentives for destructive behaviour from bankers pay is an essential first step before any other new regulation has a chance of succeeding.
Yours faithfully,
The Revd. Patrick Gerard
Labels: Bankers, G20, incentives, regulation
03 September 2009
In defense of the Tobin Tax
Willem Buiter, Professor of European Political Economy, London School of Economics and Political Science, often writes in the FT and has a blog on FT.com. His article in the FT, 1/9/09 about Tobin Tax caused me to write the below response.
The original article can be seen at http://blogs.ft.com/maverecon/ for 2nd Sept 2009 (subscription may be required).
I don’t think that you can argue that the financial sector is too large because government effectively subsidises its cost of capital by providing guarantees. This form of governmental help is less than a year old, but the problem of the oversized financial sector had developed well before that time. In fact it was the oversized “too big to fail” aspect of the financial sector, which effectively meant that government had no choice but to provide the guarantees.
It seems to me that your analysis of the problems is absolutely correct. You mention excessive churning, incentives that drive traders to make transactions, too much financial activity that is not just socially worthless but actually harmful, and too much speculation and not enough insurance. You imply that regulation should be used to directly restrict the undesirable features of contracts.
But how in practice could regulators do this? How could they keep pace with market innovation? How could they be sure that each regulation added does not create some new perverse incentive?
The first step for regulators must be to distinguish socially helpful financial transactions from unhelpful ones. It seems to me that there is no clear cut test for this. However as a general rule of thumb the nearer a transaction is to the real requirements of the real economy the more likely it is to be socially helpful. If a business needs to buy a currency in order to pay for a particular import, then this is a real requirement for a currency transaction. If a foreign currency is required in six months time for an import in six months time that must be accurately costed in the home currency now, then this is a real requirement for a currency futures transaction. Such transactions, driven by real requirements, create real value in the real economy and so are socially helpful.
In contrast a financial transaction that represents a nil sum game between the participants is much more likely to be socially problematic. When a trader takes a long or short position against another trader such that one will win money and one will lose money on the transaction then this is a nil sum game which adds no real value. A small number of such transactions are useful because they provide liquidity and facilitate the efficient spreading of risk. However a large number of such transactions actively destroy value because the transaction costs are high (traders are well paid) and risks inevitably flow towards places where they are hidden or not properly understood.
In real life it would be almost impossible for regulators to distinguish socially helpful transactions from unhelpful ones. Any attempt to do this would create an unhelpful incentive to disguise transactions to make them look socially helpful. However a Tobin tax does have a real chance of making the correct distinction. Basically a transaction that is driven by a real requirement in the real economy can usually afford to pay a small Tobin tax. In contract a nil sum game transaction cannot, because it becomes a negative sum gain after the tax has been deducted.
The question you quite rightly ask is “What distortion is a tax on financial transactions targeted at?” The answer is that we have far too many nil sum game transactions, and a Tobin tax targets these because it makes them economically unattractive.
The original article can be seen at http://blogs.ft.com/maverecon/ for 2nd Sept 2009 (subscription may be required).
I don’t think that you can argue that the financial sector is too large because government effectively subsidises its cost of capital by providing guarantees. This form of governmental help is less than a year old, but the problem of the oversized financial sector had developed well before that time. In fact it was the oversized “too big to fail” aspect of the financial sector, which effectively meant that government had no choice but to provide the guarantees.
It seems to me that your analysis of the problems is absolutely correct. You mention excessive churning, incentives that drive traders to make transactions, too much financial activity that is not just socially worthless but actually harmful, and too much speculation and not enough insurance. You imply that regulation should be used to directly restrict the undesirable features of contracts.
But how in practice could regulators do this? How could they keep pace with market innovation? How could they be sure that each regulation added does not create some new perverse incentive?
The first step for regulators must be to distinguish socially helpful financial transactions from unhelpful ones. It seems to me that there is no clear cut test for this. However as a general rule of thumb the nearer a transaction is to the real requirements of the real economy the more likely it is to be socially helpful. If a business needs to buy a currency in order to pay for a particular import, then this is a real requirement for a currency transaction. If a foreign currency is required in six months time for an import in six months time that must be accurately costed in the home currency now, then this is a real requirement for a currency futures transaction. Such transactions, driven by real requirements, create real value in the real economy and so are socially helpful.
In contrast a financial transaction that represents a nil sum game between the participants is much more likely to be socially problematic. When a trader takes a long or short position against another trader such that one will win money and one will lose money on the transaction then this is a nil sum game which adds no real value. A small number of such transactions are useful because they provide liquidity and facilitate the efficient spreading of risk. However a large number of such transactions actively destroy value because the transaction costs are high (traders are well paid) and risks inevitably flow towards places where they are hidden or not properly understood.
In real life it would be almost impossible for regulators to distinguish socially helpful transactions from unhelpful ones. Any attempt to do this would create an unhelpful incentive to disguise transactions to make them look socially helpful. However a Tobin tax does have a real chance of making the correct distinction. Basically a transaction that is driven by a real requirement in the real economy can usually afford to pay a small Tobin tax. In contract a nil sum game transaction cannot, because it becomes a negative sum gain after the tax has been deducted.
The question you quite rightly ask is “What distortion is a tax on financial transactions targeted at?” The answer is that we have far too many nil sum game transactions, and a Tobin tax targets these because it makes them economically unattractive.
Labels: regulation, Tobin Tax, trading
17 April 2009
Christian contribution to business and economics
Because of the speaking engagement on 18th May (see previous blog entry) I have been asked twice recently about the contribution that Christianity and Christian values can make to business life and to the world of economics. This caused me to write the following brief reflection.
It seems to me that the wealth of the Western world has, in large part, grown out of its religious (primarily Christian) values. The deterioration we have witnessed in those values over recent decades has been a major factor leading to the credit crunch. I don’t believe that we will find any lasting solutions to our economic problems before religious and ethical considerations are once again given far more prominence in our society and public life.
In particular we need a society where co-operation in building up the common good, takes precedent over competitive considerations. This requires a fundamental change in attitude! Competition has a useful function of controlling costs and ensuring efficiency. However this can only contribute positively to society of it takes place in the context of co-operation and a common vision at the top end of our society. Top people, (top business people, politicians, professionals) have a responsibility to work together for the good of all society. Excessive competition between top people has the effect of pulling society apart, just as we have seen our financial services sector pulled apart. Competition between top people also seems to increase pay and other costs, rather than control them.
We need to find ways of encouraging top people to co-operate in building a society that benefits everyone. The way that top people are paid is very relevant here because often it is higher pay that causes top people to compete with each other. The hope of higher pay can encourage top people to develop new agendas (for example setting up new investment funds) which might pay well, but do not actually benefit society. There is therefore a case for a cap on pay, which affects top people only. It should apply only to pay received for working for others as employees or as people who owe a fiduciary duty to others. Entrepreneurs should not be affected. People who want to become seriously rich should be encouraged to set up and grow their own businesses.
The management of risk also needs reform. Risks must be shared in a way that provides proper incentives to mitigate risk; they cannot simply traded away or insured away. Banks must take direct responsibility for the risks associated with the loans that they make. They should be able to evaluate and control these risks better than insurers. Banks should take proper account of the limitations of using of credit rating agencies. There is a serious conflict of interest associated with the issuing of a credit rating. Also, when making a loan, a bank needs to know if others are also making loans on the back of the same credit rating. Banks therefore need a far more traditional relationship with the people they lend money to.
Greed within general management must be constrained so that managers (especially top managers) are working primarily for the benefit of their company members (shareholders) rather than for themselves. Greed especially needs to be constrained in the financial services sector, where the top priority should be maintaining the health of the financial system as a whole. The second priority should be serving the genuine needs of the clients. Both of these activities must take much higher priority than maximising the profit of the financial services firm. A cap on pay could be helpful in constraining greed in these situations and restoring focus on fiduciary duty.
All these changes require far more attention to relationships, working together and values that are held in common at the top of our society. This is where I believe that the religions can contribute something extremely valuable to society and to the economy in particular.
It seems to me that the wealth of the Western world has, in large part, grown out of its religious (primarily Christian) values. The deterioration we have witnessed in those values over recent decades has been a major factor leading to the credit crunch. I don’t believe that we will find any lasting solutions to our economic problems before religious and ethical considerations are once again given far more prominence in our society and public life.
In particular we need a society where co-operation in building up the common good, takes precedent over competitive considerations. This requires a fundamental change in attitude! Competition has a useful function of controlling costs and ensuring efficiency. However this can only contribute positively to society of it takes place in the context of co-operation and a common vision at the top end of our society. Top people, (top business people, politicians, professionals) have a responsibility to work together for the good of all society. Excessive competition between top people has the effect of pulling society apart, just as we have seen our financial services sector pulled apart. Competition between top people also seems to increase pay and other costs, rather than control them.
We need to find ways of encouraging top people to co-operate in building a society that benefits everyone. The way that top people are paid is very relevant here because often it is higher pay that causes top people to compete with each other. The hope of higher pay can encourage top people to develop new agendas (for example setting up new investment funds) which might pay well, but do not actually benefit society. There is therefore a case for a cap on pay, which affects top people only. It should apply only to pay received for working for others as employees or as people who owe a fiduciary duty to others. Entrepreneurs should not be affected. People who want to become seriously rich should be encouraged to set up and grow their own businesses.
The management of risk also needs reform. Risks must be shared in a way that provides proper incentives to mitigate risk; they cannot simply traded away or insured away. Banks must take direct responsibility for the risks associated with the loans that they make. They should be able to evaluate and control these risks better than insurers. Banks should take proper account of the limitations of using of credit rating agencies. There is a serious conflict of interest associated with the issuing of a credit rating. Also, when making a loan, a bank needs to know if others are also making loans on the back of the same credit rating. Banks therefore need a far more traditional relationship with the people they lend money to.
Greed within general management must be constrained so that managers (especially top managers) are working primarily for the benefit of their company members (shareholders) rather than for themselves. Greed especially needs to be constrained in the financial services sector, where the top priority should be maintaining the health of the financial system as a whole. The second priority should be serving the genuine needs of the clients. Both of these activities must take much higher priority than maximising the profit of the financial services firm. A cap on pay could be helpful in constraining greed in these situations and restoring focus on fiduciary duty.
All these changes require far more attention to relationships, working together and values that are held in common at the top of our society. This is where I believe that the religions can contribute something extremely valuable to society and to the economy in particular.
Labels: capital, Christian, competition, cooperation, top people
05 April 2009
Event notification - "Redeeming the Market ?"
Ecumenical Council for Corporate Responsibility West Midlands
Invites you to
Redeeming the Market ?
Introduced by
Reverend John Johansen Berg
With
Father Patrick Gerard author of ‘Performance & Reward'
The Bonus Culture, its impact on companies, relationship and behaviour
&
Professor Chris Mallin of Corporate Governance & Finance.
Issues of ownership and control – the evolving role of shareholders
4.30pm – 6.30pm on Monday 18th May
@ Carrs Lane Church Centre
(Carrs Lane, B4 7SX)
Carrs Lane Church Centre is located opposite Moor Street Station, for more details please visit their website
http://www.carrslane.co.uk/
For more information please contact Barbara Hayes at cigb@birmingham.anglican.org
Invites you to
Redeeming the Market ?
Introduced by
Reverend John Johansen Berg
With
Father Patrick Gerard author of ‘Performance & Reward'
The Bonus Culture, its impact on companies, relationship and behaviour
&
Professor Chris Mallin of Corporate Governance & Finance.
Issues of ownership and control – the evolving role of shareholders
4.30pm – 6.30pm on Monday 18th May
@ Carrs Lane Church Centre
(Carrs Lane, B4 7SX)
Carrs Lane Church Centre is located opposite Moor Street Station, for more details please visit their website
http://www.carrslane.co.uk/
For more information please contact Barbara Hayes at cigb@birmingham.anglican.org
02 March 2009
Lobbying, big business and the Common Good
I was recently sent some material raising concerns about the decisions made by leading politicians, civil servants and their advisers. The concern is that pubic decisions and proposals are often developed in close collaboration with big business. Are they developed to serve the public interest or to serve the needs of big business?
It was pointed out to me that the UK Government’s Public Administration Select Committee [PASC] has recently called for:
1) consistent rules to prevent former ministers and other public servants from using contacts built up in public office to further their own and others’ private interests.
2) a single body to oversee and regulate lobbying.
Groups such as Vested interest in Politics [VIP] support this proposal and call for the banning of lobbies, large-scale funding of parties, and the revolving door (the practice of ministers, diplomats, civil servants and government advisors passing through the revolving door between government and private sector posts).
I was asked to comment on this. My comments are below:
I too am very concerned about the influence of big money on our public life. I certainly worry that many of our public policies e.g. on NHS drugs, satellite TV, financial regulation, armaments, and to a lesser extent energy and transport, are driven much more by the needs of the companies providing products and services than they are by the desire to serve the public good. To me the most outrages cases occur in the courts. It seems to me that if a case is presented in court, then justice requires some proportionality in the resources that the two disputing parties have to put into the legal case. I fear that sometimes (especially in the US) court cases are won by sheer weight of legal representation.
Unfortunately it is often very difficult to distinguish legitimate lobbying from illegitimate lobbying. Many areas of public life are now so complicated that professional input is absolutely necessary, even though it often represents a self-interest agenda. For example there are many areas of the debate about Nuclear Power, that only those involved in the Nuclear Power industry can properly comment on. Those people, and the consultants that they hire, almost always have a vested interest in the development of the Nuclear Power industry. Despite this it is still definitely in the public interest that their arguments are properly presented, even if we disagree with them and even if they are tainted by self interest.
When I lobby on the subject of executive pay, I have sometimes obtained lists of people who have submitted responses to a formal consultation about proposed amendments to the Combined Code on Corporate Governance for example. Overwhelmingly the responses come from corporations or consultancies who have the resources to get properly to grips with the issues and submit a constructive response. A few private individuals respond, but they usually have had some previous professional interest in the question. Responses from completely independent parties are very rare, and usually (like mine!) so tangential to the overall sense of direction that they cannot be worked with constructively.
What can be done?
We can't ban all lobbying; how would government ever know what to do?
I think we should do what we can to make the revolving door turn much more slowly. To ban it completely government would have to be able to grow and retain its own expertise among its own staff. This is made difficult by the hugely better pay and rewards that exist in the private sector. This could be addressed through better public sector pay, but I think that would just force the private sector pay higher. The better (but harder) solution is to constrain private sector pay. Another approach is to assume that the public sector will hire consultants when it needs expertise, but this is at best a partial solution too, because consultants always want to see growth and development in the sector they serve.
To me the most important thing is to build and develop in the Civil Service a very strong sense of public service and of the need to do things for the public good. This can only happen if the top people in the Civil service are those who have demonstrably done this over many years. It is undermined if the top people are those who have come in recently through the revolving door. It seems to me that this sense of making decisions for the public good must always be strengthened. Without this there is a danger than any restrictions on lobbying simply create a dangerous vacuum.
As ever there is an executive pay angle on this, because incentives drive our behaviours. The best rewarded people in our society should be those who make decisions for the benefit of the whole public interest; the common good which especially includes the good of the poor and those unable to represent themselves effectively. One would hope that such best rewarded people would include top civil servants and government ministers. Private sector pay, pay in specific sectors (such as healthcare) and most especially pay for consultancies, should generally be lower than top public sector pay. People who are paid owe a duty to work for the good of their employer. High pay suggests that this duty is being eclipsed by self interest. At present the top paid people in specific sectors are those who best demonstrate to the wider world the importance of the sector and why it should be developed. This situation somehow needs to be reversed. The best paid people in a sector should be those with a strong common good credentials who can explain to the specific sector how best it can serve the common good. Obviously we are a very long way away from this, but somehow the competition paradigm that we currently live under needs to be replaced by a public interest/common good paradigm, which is strong enough to control competition.
It was pointed out to me that the UK Government’s Public Administration Select Committee [PASC] has recently called for:
1) consistent rules to prevent former ministers and other public servants from using contacts built up in public office to further their own and others’ private interests.
2) a single body to oversee and regulate lobbying.
Groups such as Vested interest in Politics [VIP] support this proposal and call for the banning of lobbies, large-scale funding of parties, and the revolving door (the practice of ministers, diplomats, civil servants and government advisors passing through the revolving door between government and private sector posts).
I was asked to comment on this. My comments are below:
I too am very concerned about the influence of big money on our public life. I certainly worry that many of our public policies e.g. on NHS drugs, satellite TV, financial regulation, armaments, and to a lesser extent energy and transport, are driven much more by the needs of the companies providing products and services than they are by the desire to serve the public good. To me the most outrages cases occur in the courts. It seems to me that if a case is presented in court, then justice requires some proportionality in the resources that the two disputing parties have to put into the legal case. I fear that sometimes (especially in the US) court cases are won by sheer weight of legal representation.
Unfortunately it is often very difficult to distinguish legitimate lobbying from illegitimate lobbying. Many areas of public life are now so complicated that professional input is absolutely necessary, even though it often represents a self-interest agenda. For example there are many areas of the debate about Nuclear Power, that only those involved in the Nuclear Power industry can properly comment on. Those people, and the consultants that they hire, almost always have a vested interest in the development of the Nuclear Power industry. Despite this it is still definitely in the public interest that their arguments are properly presented, even if we disagree with them and even if they are tainted by self interest.
When I lobby on the subject of executive pay, I have sometimes obtained lists of people who have submitted responses to a formal consultation about proposed amendments to the Combined Code on Corporate Governance for example. Overwhelmingly the responses come from corporations or consultancies who have the resources to get properly to grips with the issues and submit a constructive response. A few private individuals respond, but they usually have had some previous professional interest in the question. Responses from completely independent parties are very rare, and usually (like mine!) so tangential to the overall sense of direction that they cannot be worked with constructively.
What can be done?
We can't ban all lobbying; how would government ever know what to do?
I think we should do what we can to make the revolving door turn much more slowly. To ban it completely government would have to be able to grow and retain its own expertise among its own staff. This is made difficult by the hugely better pay and rewards that exist in the private sector. This could be addressed through better public sector pay, but I think that would just force the private sector pay higher. The better (but harder) solution is to constrain private sector pay. Another approach is to assume that the public sector will hire consultants when it needs expertise, but this is at best a partial solution too, because consultants always want to see growth and development in the sector they serve.
To me the most important thing is to build and develop in the Civil Service a very strong sense of public service and of the need to do things for the public good. This can only happen if the top people in the Civil service are those who have demonstrably done this over many years. It is undermined if the top people are those who have come in recently through the revolving door. It seems to me that this sense of making decisions for the public good must always be strengthened. Without this there is a danger than any restrictions on lobbying simply create a dangerous vacuum.
As ever there is an executive pay angle on this, because incentives drive our behaviours. The best rewarded people in our society should be those who make decisions for the benefit of the whole public interest; the common good which especially includes the good of the poor and those unable to represent themselves effectively. One would hope that such best rewarded people would include top civil servants and government ministers. Private sector pay, pay in specific sectors (such as healthcare) and most especially pay for consultancies, should generally be lower than top public sector pay. People who are paid owe a duty to work for the good of their employer. High pay suggests that this duty is being eclipsed by self interest. At present the top paid people in specific sectors are those who best demonstrate to the wider world the importance of the sector and why it should be developed. This situation somehow needs to be reversed. The best paid people in a sector should be those with a strong common good credentials who can explain to the specific sector how best it can serve the common good. Obviously we are a very long way away from this, but somehow the competition paradigm that we currently live under needs to be replaced by a public interest/common good paradigm, which is strong enough to control competition.
Labels: business, common good, lobbying, public interest
05 February 2009
Obama Introduces Limits on Bankers Pay
Comments in response to a Robert Peston BBC blog entry:
President Obama’s cap on pay is an important step forward. US$ 500,000 is a sensible limit. It is high enough to avoid the “If you pay peanuts you get monkeys” problem, and low enough to avoid the “If you pay gold you get pirates” problem.
It is far too easy to be cynical about the “nice warm glow” that a manager should feel for doing a service to shareholders or the public. Top people need to feel that they are making a positive contribution to society. This should always be a central aspect of their motivation for working. Without it they will never feel fulfilment from work, however high the salary. Without it we will never get a society that is run for the benefit of all. In recent years this “nice warm glow” aspect of remuneration has been total eclipsed by the issue of pay. One powerful reason for capping pay is that it will bring it back firmly into focus.
The measure applies only to the very top people in the institution. This is important because it means that, in theory, institutions can continue to pay superstar traders and other top performers very high salaries; far higher than those of the CEO and executive directors. In practice however company boards have allowed the salaries of superstar traders to become grossly inflated because they help to justify higher salaries at board level. Once board level salaries are capped we can expect, over time, to see the board make a far more realistic assessment of what star performers are really worth. I have no doubt that this will lead to reduced requirements for traders, and to lower trader salaries.
The measure is not retrospective. Companies are only affected by the limit as they increase their dependence on government. This unfortunately creates a massive incentive on the institutions to avoid or taking government help. This will lead to some completely unjustifiable behaviours rather like Barclays accepting very expensive new capital from the middle east to avoid taking much more affordable government aid. It could also lead to banks concealing their true problems in order to delay the taking of government aid. Such behaviours, it seems to me, will lead inevitably to the nationalisation of banks. This is a serious problem, but it should be seen as a transition issue, not as a problem with the measure. Quitting our addiction to high executive salaries was never going to be easy.
In his speech (4th Feb 2009) President Obama hit the key point. He said, “But in order to restore our financial system, we’ve got to restore trust. And in order to restore trust, we’ve got to make certain that taxpayer funds are not subsidizing excessive compensation packages on Wall Street.” Fundamentally the credit crunch is a problem of trust. There is an underlying question, “For whose benefit is this company being run?” Trust can never be restored while executive pay policy suggests that companies are being run for the benefit of the executives. The public sector can enforce lower executive salaries, but in the private sector they must be self imposed. If the private sector fails to do this then it will gradually disappear into the public sector.
For Obama's speech see:
http://www.ft.com/cms/s/0/ce4790c4-f2d6-11dd-abe6-0000779fd2ac,dwp_uuid=a4559040-e7c3-11dd-b2a5-0000779fd2ac.html
(Subscription to ft.com may be required.)
Full text of Robert Peston entry is at:
http://www.bbc.co.uk/blogs/thereporters/robertpeston/2009/02/obama_biffs_bonuses.html?moduserid=movabletype69_55678&pid=75447959&upm=False&asb=False&pmp=False#dnaacs
Among other things he said, "Those running banks or car manufacturers or any business which would fall over in the absence of funding from taxpayers will probably have to take much of their reward in the form of the nice warm glow that they ought to feel for doing their public duty - and defer the bonuses for a year or five."
My comment was No 229 rejected, replaced at 233.
President Obama’s cap on pay is an important step forward. US$ 500,000 is a sensible limit. It is high enough to avoid the “If you pay peanuts you get monkeys” problem, and low enough to avoid the “If you pay gold you get pirates” problem.
It is far too easy to be cynical about the “nice warm glow” that a manager should feel for doing a service to shareholders or the public. Top people need to feel that they are making a positive contribution to society. This should always be a central aspect of their motivation for working. Without it they will never feel fulfilment from work, however high the salary. Without it we will never get a society that is run for the benefit of all. In recent years this “nice warm glow” aspect of remuneration has been total eclipsed by the issue of pay. One powerful reason for capping pay is that it will bring it back firmly into focus.
The measure applies only to the very top people in the institution. This is important because it means that, in theory, institutions can continue to pay superstar traders and other top performers very high salaries; far higher than those of the CEO and executive directors. In practice however company boards have allowed the salaries of superstar traders to become grossly inflated because they help to justify higher salaries at board level. Once board level salaries are capped we can expect, over time, to see the board make a far more realistic assessment of what star performers are really worth. I have no doubt that this will lead to reduced requirements for traders, and to lower trader salaries.
The measure is not retrospective. Companies are only affected by the limit as they increase their dependence on government. This unfortunately creates a massive incentive on the institutions to avoid or taking government help. This will lead to some completely unjustifiable behaviours rather like Barclays accepting very expensive new capital from the middle east to avoid taking much more affordable government aid. It could also lead to banks concealing their true problems in order to delay the taking of government aid. Such behaviours, it seems to me, will lead inevitably to the nationalisation of banks. This is a serious problem, but it should be seen as a transition issue, not as a problem with the measure. Quitting our addiction to high executive salaries was never going to be easy.
In his speech (4th Feb 2009) President Obama hit the key point. He said, “But in order to restore our financial system, we’ve got to restore trust. And in order to restore trust, we’ve got to make certain that taxpayer funds are not subsidizing excessive compensation packages on Wall Street.” Fundamentally the credit crunch is a problem of trust. There is an underlying question, “For whose benefit is this company being run?” Trust can never be restored while executive pay policy suggests that companies are being run for the benefit of the executives. The public sector can enforce lower executive salaries, but in the private sector they must be self imposed. If the private sector fails to do this then it will gradually disappear into the public sector.
For Obama's speech see:
http://www.ft.com/cms/s/0/ce4790c4-f2d6-11dd-abe6-0000779fd2ac,dwp_uuid=a4559040-e7c3-11dd-b2a5-0000779fd2ac.html
(Subscription to ft.com may be required.)
Full text of Robert Peston entry is at:
http://www.bbc.co.uk/blogs/thereporters/robertpeston/2009/02/obama_biffs_bonuses.html?moduserid=movabletype69_55678&pid=75447959&upm=False&asb=False&pmp=False#dnaacs
Among other things he said, "Those running banks or car manufacturers or any business which would fall over in the absence of funding from taxpayers will probably have to take much of their reward in the form of the nice warm glow that they ought to feel for doing their public duty - and defer the bonuses for a year or five."
My comment was No 229 rejected, replaced at 233.
Labels: Limit, motivation, nationalisation, Obama, trust
