04 January 2010
Q&As on the Global Pay Cap - 1
Click here for the original article about a global cap on pay.
Click here for the global-cap-on-pay letter published by the FT, 12/12/2009.
Agreeing a global cap on pay and making it stick would be really tough - look how difficult international leaders have found it to agree anything on climate change. Is it feasible?
I agree that agreeing a global cap and making it stick is a tough challenge. However I can't help feeling that any less radical reform would not really get to the heart of the problem. Also, compared to climate change, a global pay cap has three big things going for it.
1) It is a simple concept.
2) It would be popular with voters.
3) It offers a cheap way of recapitalising banks
Like climate change there would be powerful vested interests working against it, but it is much easier to see it gaining rapid political momentum.
[Incidentally, if the pay of oil chiefs was capped and not affected by oil profits, then I suspect that oil chiefs would be far more ready to work constructively on the climate change agenda.]
Also we have to recognise that as the world gets more and more interconnected then there will be more and more need for global agreements. Truely international issues such as climate change and financial regulation really require international agreements. World leaders are going to have to get much better at delivering them!
To what parts of banking should the cap apply?
I agree that there are issues about where the cap should apply, but in the first instance it is very simple. Money made from someone investing his/her own money or growing his/her own business is not captured. Money made from other people's money or businesses is. All company directors and employees are working for a company and not for themselves so all wages and salaries, whatever form they are paid in, are all captured. All banking activities are clearly captured.
Where it potentially gets more difficult is with people like lawyers, accountants and consultants who are partners in a firm or have a company limited by guarantee, so they do make money from growing their own businesses. However it seems to me that this money should still be captured under the cap because they do not act as "Principals" but rather as "Agents" of their clients. They are therefore working for their clients and owe their clients a Fiduciary Duty.
The really fundamental issue that the cap is trying to address is making sure that "Agents" really do act as "Agents" and properly respect the interests of their "Principals". If agents are highly paid, or on performance related pay, then it suggests that they are working for their own benefit, not for the benefit of the Principal. This agency problem is a really deep problem. See http://en.wikipedia.org/wiki/Principal-agent_problem . It is also an ancient problem. Note that Jesus discusses the agency problem in his parables (e.g. Luke 16: 1-8). Alan Greenspan's comments on the cause of the credit crunch are very important. He says that in 60 years dealing with American business he had always assumed that companies worked to maximise the company interest, and especially to avoid their own destruction. However the risks taken in the build up to the credit crunch show that this assumption was no longer valid. Managers made the decisions that worked for managers, more than for the companies they managed. Part of the reason for this was the intensity of the competitive pressures than managers were facing.
Could not more be done to boost competition in the banking sector which is riddled with cartels and other practices aimed at artificially pushing up profits, and hence bonuses, at the expense of the customer?
I agree that there is a lack of economically effective competition in many sectors of banking. In the left hand column of this blog there is a link "Competition Law" which documents my efforts to get the Office of Fair Trading excited about the competition problems in the market for executive talent. Having said that, I no longer believe that more effective competition could ever solve the problems. The top people in society need to collaborate before they can compete. If they only compete then they pull society apart. Competition is certainly a big factor in the falling apart of the financial sector.
Are you aware of Stephen Green, Chairman of HSBC, and his work on banking ethics?
I am aware of Stephen Green through a Church Times article, but I don't know much about him really. I am interested in his book "Good Value"(although I am hopeless at reading!) HSBC is a good example of a bank that did not allow competitive pressures to distroy it. In the year before the crisis HSBC was under intense pressure from the activist investor Knight Vinke who thought HSBC should use its balance sheet more agreesively to improve "performance". I think HSBC was able to see through this because of its strong comporate culture and its emphasis on long term returns in the pay of top people.
Click here for the global-cap-on-pay letter published by the FT, 12/12/2009.
Agreeing a global cap on pay and making it stick would be really tough - look how difficult international leaders have found it to agree anything on climate change. Is it feasible?
I agree that agreeing a global cap and making it stick is a tough challenge. However I can't help feeling that any less radical reform would not really get to the heart of the problem. Also, compared to climate change, a global pay cap has three big things going for it.
1) It is a simple concept.
2) It would be popular with voters.
3) It offers a cheap way of recapitalising banks
Like climate change there would be powerful vested interests working against it, but it is much easier to see it gaining rapid political momentum.
[Incidentally, if the pay of oil chiefs was capped and not affected by oil profits, then I suspect that oil chiefs would be far more ready to work constructively on the climate change agenda.]
Also we have to recognise that as the world gets more and more interconnected then there will be more and more need for global agreements. Truely international issues such as climate change and financial regulation really require international agreements. World leaders are going to have to get much better at delivering them!
To what parts of banking should the cap apply?
I agree that there are issues about where the cap should apply, but in the first instance it is very simple. Money made from someone investing his/her own money or growing his/her own business is not captured. Money made from other people's money or businesses is. All company directors and employees are working for a company and not for themselves so all wages and salaries, whatever form they are paid in, are all captured. All banking activities are clearly captured.
Where it potentially gets more difficult is with people like lawyers, accountants and consultants who are partners in a firm or have a company limited by guarantee, so they do make money from growing their own businesses. However it seems to me that this money should still be captured under the cap because they do not act as "Principals" but rather as "Agents" of their clients. They are therefore working for their clients and owe their clients a Fiduciary Duty.
The really fundamental issue that the cap is trying to address is making sure that "Agents" really do act as "Agents" and properly respect the interests of their "Principals". If agents are highly paid, or on performance related pay, then it suggests that they are working for their own benefit, not for the benefit of the Principal. This agency problem is a really deep problem. See http://en.wikipedia.org/wiki/Principal-agent_problem . It is also an ancient problem. Note that Jesus discusses the agency problem in his parables (e.g. Luke 16: 1-8). Alan Greenspan's comments on the cause of the credit crunch are very important. He says that in 60 years dealing with American business he had always assumed that companies worked to maximise the company interest, and especially to avoid their own destruction. However the risks taken in the build up to the credit crunch show that this assumption was no longer valid. Managers made the decisions that worked for managers, more than for the companies they managed. Part of the reason for this was the intensity of the competitive pressures than managers were facing.
Could not more be done to boost competition in the banking sector which is riddled with cartels and other practices aimed at artificially pushing up profits, and hence bonuses, at the expense of the customer?
I agree that there is a lack of economically effective competition in many sectors of banking. In the left hand column of this blog there is a link "Competition Law" which documents my efforts to get the Office of Fair Trading excited about the competition problems in the market for executive talent. Having said that, I no longer believe that more effective competition could ever solve the problems. The top people in society need to collaborate before they can compete. If they only compete then they pull society apart. Competition is certainly a big factor in the falling apart of the financial sector.
Are you aware of Stephen Green, Chairman of HSBC, and his work on banking ethics?
I am aware of Stephen Green through a Church Times article, but I don't know much about him really. I am interested in his book "Good Value"(although I am hopeless at reading!) HSBC is a good example of a bank that did not allow competitive pressures to distroy it. In the year before the crisis HSBC was under intense pressure from the activist investor Knight Vinke who thought HSBC should use its balance sheet more agreesively to improve "performance". I think HSBC was able to see through this because of its strong comporate culture and its emphasis on long term returns in the pay of top people.
Labels: competition, global cap, HSBC, international, Stephen Green
