Calling the bluff of the super-salaried

Money under a magnifying glassHere’s my latest column from the Ham & High:

Well, well – we’re about to find out whether we’ve been told the truth or a porky by those super-salaried people who, with the assistance of bonuses, have consistently earned more in a year than most people earn in decades (and in some cases even more: Johnny Cameron of RBS earned £3.3 million in 2007 whilst his colleague Sir Fred Goodwin earned £4.2 million).

I say that because one of the most frequent justifications has been – if you don’t pay these sorts of salaries, you don’t get the very best people – and without the very best, firms will be millions or even billions worse off. Even last year that defence was looking rather hollow in the financial sector – if that’s what having the very best people in charge does, a little bit of mediocrity and a little less self-belief might be rather better! But now, both here and in the US, we’re about to see those claims really put to the test.

With both the Barack Obama salary caps for top financiers and the pressure in Britain to axe bonuses, at least at the very senior levels, we’re about to find out what really happens if those pay packets aren’t quite so astronomical. Those terribly well paid people are getting their bluff called. You told us you had to get that sort of pay to be attracted to those posts and stay in them. So are you going to walk now your pay is trimmed back? We’ve not exactly seen an exodus so far – and I very much doubt we will, beyond those forced out because their bungling was just too much for their banks’ reputation to bear.

Because what’s really driven those pay levels has been a lack of accountability. There has been far too cosy a consensus amongst the banking elite that they talk up the need for each other to be quite so well paid, and with the failure of bank shareholders to intervene, money has been dished out inappropriately.

It is not just the levels of pay that are questionable – and you really do have to question whether a senior banker is really so uniquely talented and vital and important as to be worth decades worth of pay for other jobs – but also the bonus culture, based on short-term profits.

That approach has been wrong for two reasons. First, it has encouraged the slash and burn style where people run big risks, get it right for a while, bail out after having made a nice little pile- and it doesn’t matter to them what they leave behind as they’re no longer there.

Second, there has been far too little attention to the robustness or fragility of the profits run-up. Indeed, giving evidence to Parliament, HBOS’s Lord Stevenson said, “The fundamental mistake of HBOS was the failure to predict the wholesale collapse of the wholesale markets”. He’s wrong. Their failure wasn’t to predict a particular collapse at a particular time. Their failure was to have a business model that was far too vulnerable to the unexpected.

I know from my own business experience that you have to expected the unexpected. You don’t know what the surprises are going to be – perhaps a collapsed ceiling will put your premises out of operation, or a key supplier for the Christmas period will go bust, or a key member of staff will fall seriously ill – but you do know that it’s foolish, foolish, foolish to not be prepared for the unexpected.

Or as the saying from Agathon puts it, “It is probably that the improbable will sometimes happen”. And you don’t have to be paid a financial chief-sized bonus each year to know that.

0 thoughts on “Calling the bluff of the super-salaried

  1. The problem is the lack of shareholder power. Directors have made every effort to exclude them from being able to comment or vote agaist them, relying on the support of the pension funds – who fail to represent the issues of their stakeholders, in turn. Call their bluff; yes.Perhaps the other simple measure I would like to see could be on your list too, Lynne. Like you I have run a number of small businesses over the years. Every time you want a loan the banks want your house as a guarantee. Why can’t we the taxpayer have the same conditions attached to taxpayer loans to banks? You can have your loan, so long as all the Directors and Managers put their houses up as guarantees. The might make them more responsible!

  2. I find itall hilariouse in a grim sort of way, its not their money and if we the people had not been forced to give our money straight from the pay packet the pension packet the benefit packet the almost tom cobbly and all packet we would not be beholden to these scammy looters in suits, the very idea that you should be forced to hand over your cash from source and the n get charged to borrow some of it is just stupid and crazy, the sad gloomy glum side of it all is that people are to weak headed to even realise they have been had,then they have the double cheek to give you a tiny amount in interest if you save, they really should be on their knees in thanksgiving to us whose money they are hoarding, but no we are suposed to pay them bonuses for fiddling while rome burns.

  3. Why can’t we license them? We do it for doctors and lawyers and architects, etc. If you have to pass a simple exam to get a license to work – at any level – in a bank. That would focus their minds. Mess up in the boardroom and you get struck off. End of banking career.

  4. It’s about time the shareholders came out and made our views clear. I am retired and a small-scale Lloyds shareholder. It is [was?] a vital part of my pension provision. The Banks have had public money, but who’s giving a thought to thousands of us whose savings are rapidly vanishing, and almost certainly will if they nationalise? Lynne, please can you help Shareholders to unite?!

  5. The tie in between wealthy bankers and top politicians enabled the relaxation of regulation and the creation of a system that allowed the money placed in the trust of the banks by depositors to be used as the fuel of huge gambling sprees by the same top bankers. All this investment activity was hidden behind more and more exotic investment ‘instruments’that even the investment bankers themselves failed to understand. There needs to be a complete disconnect between the normal banking business (depositing, withdrawing and direct loaning to well considered projects) and the investment banking business. Those that wish their money to be ‘invested’ in the highly risky business of stocks, shares, deriviatives etc. need to be able to see and understand the risk associated with those investments. If they fail to understand the risk then they and they alone will pay as the business fails. Those people and businesses that just want to save their money need to know that the risk is absolutely minimal i.e. their money is as safe as in ‘the Bank Of England’. Now the ‘banks’ are being bailed out with money derived from taxation of the wealth of ordinary citizens and businesses because the banks investment arms have made huge losses trading (gambling with) what they refer to as ‘Toxic paper’. In this they were totally oblivious to the ‘risk’ built in to the original loans or mortgages represented by these Toxic loans – It would have been almost impossible to do the ‘Due Diligence’ required on these ‘Toxic Loans’ – So first mistake: lending money ( or ‘Value’) to people who did not and could not possibly earn the money required to pay back that ‘value’Second mistake: selling on that unrepayable value/debt to other institutions. Third mistake: buying those loan documents as an investment. Much of this is already now understood but it is the disconnection of ‘Investment Banking’ from normal commercial deposit banking that is key to controlling banking excesses. In this way, those that wish to dream up complicated mechanisms for gambling with other peoples money will be restricted to those investors who are happy with that kind of blind risk. Those investment bankers who have brought their banks and the countries within who’s borders they operate to their knees are as stupid as and no better than the fool who goes to a horse race and bets on the basis of the odds he is given i.e. without knowing anything about the horse. They are guaranteed to loose ultimately. They do so with money from you and me. ( without the regulation and disconnect, you and I have no choice about what happens to our money and yet we have the priviledge of voting in the fools that deregulated the banking industry). Bring back the separation of commercial, and investment banking that was thrown out by deregulation. We don’t need to go through this again.

  6. Some time ago I possessed a biography called ‘Boone’, which I now identify with the work of the oil magnate T Boone PickensIn it Boone complains about the plight of the shareholder, when it comes to dealing with managementAs it is obviously time that this sector was brought into some discipline, perhaps Boone could be consulted for his views and experiences?

  7. Wednesday Feb 18th, 2009Dear LynneA few days ago (Feb 15th) Will Hutton wrote a piece in the Observer – in which he quotes (para 11-12) -” … Buried in the 1,000-page recovery plan are measures to limit(USA) bonuses to one third of base pay, which, with the proposed$500,000 salary cap, is a swingeing assault on bank remuneration.Bankers are in no position to complain. … “Assuming that the USA is an even more litigious country than the UKwhy does Gordon Brown fear to issue a similar decree?Frank Connolly