UK bank pay exposure could be counter-productive

January 13, 2011

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

LONDON — The UK coalition’s mutterings about greater bonus disclosure look counter-productive. The Liberal Democrats, the government’s embattled junior partner, are understandably anxious to show voters they understand public anger about excessive banker pay. But publishing banks’ highest pay packages is not the way to go about it.

The Lib Dems are pushing what they describe as a “Hong Kong-plus” system. In Hong Kong, regulators require all firms to disclose the remuneration — though not the identities — of their five highest-paid employees. Lib Dem officials think this could be souped up: either by revealing more numbers, or by divulging names.

On one level, this sounds like a good idea. In theory, greater transparency should help shareholders compare remuneration patterns across different banks and hold management to account. This is difficult if lenders only disclose the size of the total bonus pot.

But transparency may not be a big enough issue to help the Lib Dems look tough. Take HSBC, which as a Hong Kong-listed company has disclosed the remuneration of its top five earners since 1994. This has had no noticeable effect on limiting top pay.

Indeed, greater transparency could be counter-productive. If top bankers realise they are not paid as much as some of their colleagues or competitors, they may demand more. Instead of exercising greater restraint, banks may come under pressure to pay up. Meanwhile, publishing names could be a breach of individuals’ rights to privacy.

The Lib Dem plan could also undermine the UK banking sector. In a review for the government, published in 2009, David Walker suggested publishing the number of bankers who were paid between 1 million and 2.5 million pounds, 2.5 million and 5 million pounds, and 5 million pounds and over. But Walker has since concluded that taking a unilateral approach could put UK banks at a disadvantage to international rivals, who face no such constraints.

It’s no surprise that the Lib Dems want to bash bankers in order to help improve their standings in the polls. But greater disclosure doesn’t look the right answer.

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