LONDON — U.S. President Barack Obama has called for an annual salary cap of $500,000 for directors of banks receiving government funds. (It is worth noting that this sum is $100,000 more than the president’s salary.)
President Sarkozy of France is reported to be demanding stringent restrictions on bankers pay. The British government has tried to defuse the problem by setting up a committee to report on banker remuneration by yearend. This apparent delaying tactic has not satisfied public opinion, which is outraged at corporate bankers’ receiving huge bonuses despite banking losses and despite the catastrophic fall in bank shares.
Reports that the Royal Bank of Scotland, now 70 percent publicly owned, ownership wants to pay £1 billion in bonuses to staff after posting its largest loss in banking history have now forced the government to demand significant restraint on bonus payments.
As expected, bankers have been squealing hard, arguing that without big incentive bonuses, brighter staff will go elsewhere. But banks are shedding staff rather than recruiting and don’t want to take on executives whose expertise in risk-taking helped bring so many banking institutions to the brink of bankruptcy.
Bankers also argue that they will put less effort into their work if they are not given large bonuses as incentives. This suggests they will work only for high pay. Money undoubtedly matters, but it is not the only factor that motivates staff. Job satisfaction and a friendly and stable work environment that allows for a proper balance between work and family are also important for most people.
A third argument is that some bonuses have been specified in employment contracts. If so, such employment contracts should be ended as soon as legally possible; future contracts should not obligate employers to pay bonuses whatever the circumstances.
In the past few years the gap between the earnings of top executives and the average worker has grown hugely even under Britain’s Labour government. According to one calculation, the boss of a large company in Britain gets about 75 times the average pay of employees.
In the United States, this difference is even greater, having more than quadrupled the past 20 years. There may be a few business geniuses who by their flair and leadership have managed to turn around loss-making companies and thus deserve high rewards, but even they could not have succeeded without harnessing the energy and dedication of the workforce. Anyone who chalks up success solely to personal ability is deluding himself, his employees and his shareholders.
Sports figures and film stars may also be over-rewarded. In addition to fat paychecks, they receive honors, such as Oscars, and endorsement contracts that add to their fame. The average person, while perhaps envying the extravagant rewards of sports and film stars, probably recognizes that he or she does not have the talents to compete with the stars. Few would quarrel with the rewards given to scientists, inventors or top medical experts. In fact, the best surgeons and physicians are less well rewarded than the bosses in industry and finance.
The main target of public wrath has been bankers because they are perceived as having collected large bonuses for deals that soured and jeopardized the industry. There has been no mechanism for clawing back bonuses in the event of failure or for ensuring that bonuses are tied to long-term rather than short-term performance.
There is also considerable suspicion that some individual bonuses were awarded on the basis of favoritism and did not always take into account success owed to a team rather than to individual effort. The excessive rewards received by bankers in the West should be regarded as a thing of the past, and a serious effort should be made to narrow the gap between the pay of the average worker and top executives.
We don’t need to emulate Russian oligarchs and Middle Eastern princes who flaunt their wealth, go around in private yachts and drive fast and expensive cars. The bonus culture and the displays of wealth of recent years should stop in this recession and should not be allowed to reappear when the economy recovers.
So, how do we prevent a return to greed and stop over-rewarding the higher corporate echelons and the dealers, while ensuring adequate incentives?
This cannot be achieved by government fiat. As long as a bank remains in partial public ownership, the government should exercise its share holdings to stop bonus payouts.
When banks are re-privatized, shareholders and nonexecutive directors must insist on restraint. If monetary incentives in the form of bonuses or extra emoluments are needed, these must be structured to ensure that they are only paid for achievements over years, not for short-term profits. They should be largely in the form of shares that must be held over a longish period before they can be sold.
Hugh Cortazzi, a former British career diplomat, served as ambassador to Japan from 1980 to 1984.