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.
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.
Labels: bank debt, global cap, reward, risk, Tett
02 April 2006
The book: Performance and Reward
Click here to view the book on the publishers website. Google Preview is available through this site, allowing you to read most of the book and to search its pages.
Click here to view the book on Amazon.co.uk. From this site it is possible to search the pages of the book.
Click here to view the book on Google Books. It is possible to read most of the book from this site using a larger window than in Google Preview.
Performance and Reward was published in April 2006. The book reviews typical executive pay practices in the UK and highlights the problems that these cause. It also shows how the problems can be solved.
Most of the book is concerned with a detailed examination of the incentives arising from a typical executive reward package. Unfortunately the incentives are seldom properly focused on the creation of long term shareholder value. Short term, individualistic incentives are far too common, and the book shows how damaging these can be. The book proposes a new executive pay structure called a FILLIP, which ensures that executives have incentives to create shareholder value in the long term.
The last part of the book is concerned with the level of executive pay. It explains how the current very high levels of pay have come about and examines some of the problems that these have caused. The book highlights the limitations of a comparative approach to setting executive pay. It encourages remuneration committees to consider the leadership message that is conveyed by the level of executive pay.
The book is important reading for anyone directly involved in executive pay policy. Members of remuneration committees will find it particularly useful, although all directors of listed companies need to be aware of its main points. Activist shareholders, consultants, lawyers, accountants and regulators concerned with executive pay will find in the book an essential critique of current practice and constructive suggestions for making improvements.
Click here to view the book on Amazon.co.uk. From this site it is possible to search the pages of the book.
Click here to view the book on Google Books. It is possible to read most of the book from this site using a larger window than in Google Preview.
Performance and Reward was published in April 2006. The book reviews typical executive pay practices in the UK and highlights the problems that these cause. It also shows how the problems can be solved.
Most of the book is concerned with a detailed examination of the incentives arising from a typical executive reward package. Unfortunately the incentives are seldom properly focused on the creation of long term shareholder value. Short term, individualistic incentives are far too common, and the book shows how damaging these can be. The book proposes a new executive pay structure called a FILLIP, which ensures that executives have incentives to create shareholder value in the long term.
The last part of the book is concerned with the level of executive pay. It explains how the current very high levels of pay have come about and examines some of the problems that these have caused. The book highlights the limitations of a comparative approach to setting executive pay. It encourages remuneration committees to consider the leadership message that is conveyed by the level of executive pay.
The book is important reading for anyone directly involved in executive pay policy. Members of remuneration committees will find it particularly useful, although all directors of listed companies need to be aware of its main points. Activist shareholders, consultants, lawyers, accountants and regulators concerned with executive pay will find in the book an essential critique of current practice and constructive suggestions for making improvements.
Labels: Book, performance, reward
