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
