19 June 2010

 
Today I wrote to the Financial Times.

Dear Sir,
I enjoyed Gillian Tett's article Ideas on curbing bankers appetite for risk (15/6/2010 on ft.com) about finding the best incentives for top bankers. I was also interested in Dr Steve Webb's letter (18/06/10) suggesting bonuses be paid in the bank's own long term debt, and requiring that this be held to maturity. My own proposals on executive rewards (Performance and Reward, Troubador 2006) was that payment be made in long term equity, which should be even more sensitive to excessive risks than long term debt.
However since writing that book, I have, like the New York Federal Reserve, come to realise that there are fundamental problems with linking bankers' rewards to profit or returns. The profound links between profit and risk mean that an incentive to increase profit is in fact an incentive to increase risk. Increasingly, because risk is subject to regulation, the incentive is actually to create hidden or understated risk, and this is even more dangerous in the longer term. The great complexity of the area means that there will always be clever people who can make a lot of money for themselves by circumventing or perverting the system. They have made their fortunes long before the world properly understands the dangers involved in what they have done.
This is why I now advocate a brutally simple global cap on bankers' pay. It is the only realistic way of curbing the risk appetite. Such a cap is not against enterprise or investment; rather it is to protect entrepreneurs, business owners and investors from the greed of their agents.
Yours faithfully
The Revd Patrick Gerard

Click here for the original article about a global cap on pay.
Click here for more on the problems of linking pay to profit.

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