The banks’ reaction to the bonus cap shows that it may take longer than expected for them to regain the trust they have lost, because they seem not to appreciate why they lost it in the first place. My latest column for Financial News.
When it comes to pay, the only time investment banks open their mouths is to change feet. In their recent efforts to get round the cap on bonuses in Europe they have managed to shoot themselves in the foot at the same time.
In doing so, they have shown that it may take longer than expected for banks to regain the trust they have lost, because they seem not to appreciate why they lost it in the first place. It also suggests that instead of using the past five years as an opportunity to have a fundamental rethink about pay in the industry, banks have instead just been counting down the days until normal service can be resumed.
Over the past few months, banks have been working frantically to come up with ingenious ways of getting round the new rules that limit bonuses to being equal to fixed pay (or twice the level of fixed pay if shareholders give their explicit approval). The majority seem to have adopted some form of “role-based allowance” that sits somewhere between a salary and a bonus and that would be paid monthly to help top up any shortfall in income for bankers or traders.
It’s probably not quite what the European Parliament had in mind when it voted the cap into law last year. To many people outside the industry – and some inside it – it all looks a little squalid.
You may well think that the bonus cap is mad (and there is plenty of evidence to support that view). And you may think that the public’s interest in what banks pay their staff is little more than intrusive titillation (ditto). But you can also look at pay as a barometer of how the industry thinks about itself in relation to shareholders and to society.
One wise old banker said recently he was dismayed that the banks’ efforts to get around the rules were “a slap in the face” to policymakers that could trigger another regulatory backlash or at least prolong the banks’ public purdah.
If you ask most people inside the industry what this manoeuvring looks like to outsiders, you are likely to get roughly the following response: it’s unfair of European legislators to pick on banking and it’s unfair to put European banks at a competitive disadvantage by imposing rules that don’t apply to their US and Asian rivals.
To keep pay at competitive levels, banks will have to increase fixed pay, which will reduce their cost flexibility. If they don’t, their top staff will migrate to the shadow banking sector or move to the US or Asia.
And finally, the argument goes, pay has already come down faster than most people think, more of it is deferred than before and for longer, and more of it can be clawed back if things go wrong. Besides, there is nothing illegal with the allowances, so what’s the problem?
Some of these arguments have some merit. The cap was always going to lead to an increase in fixed pay: base salaries for the top staff at investment banks in the UK including Bank of America, Goldman Sachs and JP Morgan would have to more than double if overall remuneration were to remain at the same level while complying with the rules on capping. It is, indeed, “unfair” that Europe has gone much further than the US in reforming bankers’ pay (although a large part of that is down to the success of the bank lobby in the US at arguing down reforms on pay that were supposed to have been implemented globally).
And it will, indeed, reduce the banks’ flexibility on costs, but not by as much as some scare stories suggest.
I wonder, however, if the overall thrust of the banks’ argument doesn’t display something more worrying. First, as any politician knows, the moment you have to start explaining your position, you have probably already lost the debate.
And second, regardless of the validity or otherwise of the argument, their approach betrays a dangerous lack of self-awareness and context. There is no awareness, for example, of the thinking of the shareholders who have yet to vote on the level of the bonus cap at each bank, or what the policymakers might think of them breaking the spirit of the rules.
It betrays a mindset that still sees regulations as a challenge to be overcome instead of a set of rules to be followed and that doesn’t see the irony in paying billions of dollars in bonuses to bankers and traders at loss-making banks in the name of retaining talent, or in paying a chief executive $1 million for every $1 billion in fines and settlements that he agreed to pay out of his shareholders’ pockets last year. This is an industry that believes it is time to move on and stop being beastly to bankers, instead of one that really believes what it says in public about taking a generation to restore trust.
There are lots of ways the industry could have reacted. It could have taken the opportunity to be much more transparent about pay. It could have decided to stick to the spirit of the rules (if only for a year or two), or to fundamentally rethink the division of rewards between staff and shareholders.
Maybe it could have gone back to the future in bringing pay down to the level of other high-end professions – or even to move away from bonuses altogether in favour of a career-long process of wealth accumulation. Instead, the industry has deployed its brains and attention on preserving the very bonus system that signals its resistance to change.
Perhaps, the real problem is that everyone’s terms of reference are framed by their own experience. In the few decades before the crisis the numbers at investment banks were artificially inflated by leverage, innovation and deregulation.
Now that all three of those have slammed into reverse, it is time for pay to go the same way. It is entirely understandable that many people don’t want that to happen and, while pay has come down, it has a long way to go before it falls to a more sustainable level.
On the evidence of the past few months, banks clearly also have a long way to go in terms of thinking about how and what they pay their staff, and what that says about the way they run their business and how that business fits into society. Let’s hope they give it some more thought – before they shoot themselves in both feet.
–This article was first published in the print edition of Financial News dated February 3, 2014