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Big bank bonuses seem set to stay
Two years after British taxpayers spent £66 billion rescuing banks threatened with collapse, banks' senior executives continue to receive extraordinarily large sums in salaries and bonuses.
Take Barclays chief executive Bob Diamond. His salary and bonus for 2010 totalled £6.75 million and, say Murphy, Jenkins and Baer in the December 2010 issue of the Financial Times, 'the only real surprise was that the figure was lower than expected'.
Even though Barclays did not have to call on Government funds during the worst of the financial crisis, eyebrows were raised when it emerged that the average pay of the bank's 230 most senior staff was £2.4 million.
Barclays is not alone in paying such high amounts to its top people. Evolution Securities reports that pay per employee at investment banks Goldman Sachs, UBS, Credit Suisse, Deutsche Bank and Morgan Stanley averaged $403,000 last year - or ten times average national earnings in the UK and USA. Murphy, Jenkins and Baer ask whether such sums can be justified.
In the blue corner are those who argue that the pay reflects the vast amounts of money that top bankers are responsible for, and that star traders and bankers can bring in huge multiples of their pay in the form of client revenues. The market for banking talent is global, making it impossible for one institution or market to lower pay.
In the red corner are economists who say that the premium paid to bankers is far higher than should be needed to attract people to work in the sector. They point out that pay premiums extend to a wide range of employees who work in banks. Office managers, for example, receive an average 15% more in banks than in other sectors, while banks' information-technology specialists are paid a 30% premium.
Like most of his colleagues across the world, UK Chancellor of the Exchequer George Osborne seems to believe that bankers' pay and bonuses are too high. But while encouraging bank bosses to show restraint, he appears reluctant to impose curbs through legislation.
The approach is consistent with the Government's so-called 'nudge' philosophy, which involves encouraging people to do the right thing - from eating more healthily to giving more to charity - rather than introducing new laws to force their behaviour.
The nudge philosophy is consistent with Conservative ideals of the Big Society and a smaller state. But, in the March 2011 issue of Economic Affairs, Booth believes that enthusiasm for it is misplaced. It can undermine freely chosen paternalistic mechanisms and does not guarantee to produce better government decision-making about whether to intervene in a free economy.
Murphy, Jenkins and Baer, meanwhile, put forward the view that bankers' bonuses may eventually fall not because of government legislation or encouragement, but through 'the indirect effect of more stringent capital requirements and a crackdown on some of the riskiest business lines - and the most profitable'. The authors continue: 'The shift of people and resources into less volatile businesses such as asset management will also contribute to the downward drift in banks' overall pay levels. So, too, will the migration of jobs to emerging markets and the industry's increased dependence on technology.'
But don't hold your breath for big pay cuts any time soon. The authors conclude: 'With bank pay levels having largely withstood the greatest financial crisis in a generation, doubts persist as to whether they will, in fact, obey more standard market forces in coming years.'