There is a big problem at the heart of the debate about bankers’ pay and bonuses. There is a yawning gap between the logical and the moral arguments for keeping restrictions in place.
The logical financial argument is quite straightforward. Banks that were bailed out and still majority-owned by the State should not be hampered by restrictions which make it more difficult for them to attract the best people.
Having the best people do the best job will increase the value of the State’s shareholding and give AIB and PTSB a better chance of returning all of the taxpayers’ bailout funds.
Similarly, why should they be held back with an executive pay cap, restricting the CEO to a salary of €500,000 per year, when no such restrictions apply to their non-bailed out private sector colleagues in other banks?
When it comes to these banks today, the share register of investors is hardly the same as the time of the banking collapse in 2008. Top-ranking senior management are not the same. The board members are not the same and many of the staff have probably moved on, not that it was their fault in the first place.
If the banks are properly regulated and have independent functioning boards, then financial logic says they should be left alone to get on with their business within the limits of what regulation and their boards allow.
It is also hard for the State to sell more shares in these banks to private investors when the restrictions could inhibit their financial performance compared with other banks.
If the banks are properly regulated and have independent functioning boards, then financial logic says they should be left alone to get on with their business
This is the pure straightforward financial logic and common sense argument.
But there is another side, which is about moral hazard and the mistakes these very same institutions made in the past which cost taxpayers and customers greatly.
The moral hazard argument is that even with the executives, investors and board changes they are still the same organisations that received taxpayer money and have yet to return it all.
The financial crash exposed failures in the culture of regulation, banking and politics, and bankers simply cannot be in a position to financially enrich themselves on the back of a bailout.
Even if vital lessons were learned in the wake of the financial crash, the tracker mortgage scandal, which came about afterwards and continued until quite recently, shows that bank culture hadn’t really changed enough.
In fact, if the tracker mortgage scandal had not happened there is every good reason to think the Government would have done away with these restrictions some years ago.
Another argument says that when it comes to CEOs, neither AIB nor PTSB has suffered in any obvious way from the choice of personnel they attracted to the top job with the pay restriction in place.
AIB has had several very effective CEOs since the pay cap took effect, which appears to undermine the argument that it cannot attract the best to that position. Mind you, they have all moved on.
When it comes to picking our way through this financial logic and moral hazard maze, we have to bear in mind a few things.
Firstly, the top executive pay cap and the bonus situation are two different things. There are lots of people working in state-controlled banks who would benefit from the incentivisation that a bonus structure brings. It might help to retain 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 any such lending is taking place in the market now.
Many people who earn a fraction of €500,000 might be retained in these banks or indeed within the industry if they could realistically receive a performance bonus. With a proper bonus structure they might do a better job instead of a worse one. It is up to the banks’ management, board and regulators to ensure that bonuses do not lead to reckless lending or miss-selling.
The problem with the executive pay cap is that boards of many organisations over-pay senior executives
Alternatively, perhaps the bonus restrictions were put in place as a form of punishment for the expensive failures of the past, which took place more than 14 years ago. If that is the case, many staff have left or retired, and 14 years is a pretty long stretch.
The problem with the executive pay cap is that boards of many organisations over-pay senior executives. We have seen senior bankers paid millions in banks across Europe and the US only to make a complete mess of the job.
Supine boards are endemic in many big corporations.
The banking profession more than blotted its copybook with the financial crash. The tracker mortgage scandal showed that a subsequent group of bankers and board directors chose to interpret rules collectively across the system in a way that favoured the banks over their customers.
A lot has improved and lessons have been learned but will that be until the next time?
I remember speaking to a former non-executive director of a bailed-out bank who told me that when massive loan applications came before the board in the boom, they never once broke any bank rules or Central Bank guidelines in approving them. Yet, the bank had to be bailed out to the tune of billions.
More recently, I remember talking to a former non-executive of a bailed-out bank who said they would never comprehend how someone who didn’t have a tracker mortgage during the boom, should now be entitled to one or compensation. This was despite independent experts, such as the Central Bank, concluded that customers who were not presented with all of the available mortgage choices should be compensated.
Paschal Donohoe is right to move things on from the past. But it should only be done in tandem with the banks showing they have moved on too.
