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The social cost of runaway bank pay

If only the economy were bouncing back as fast as banking compensation.

Even as the first anniversary of the collapse of Lehman Brothers draws near, bankers and traders are now grabbing a larger share of their institutions’ net revenue than they did during the boom years. The leading U.S. banks are on track so far this year to pay their employees $156 billion — more than in sunny 2006.

Politicians have focused mostly on whether the bonus structure can be changed to discourage bankers from making reckless bets with their shareholders money. But a bolder solution to excessive banking pay is necessary. It starts with a simple question: Are bankers paid too much? The answer is a resounding yes.

Everybody enjoys a bout of cathartic outrage over the pay of reality TV personalities and sports stars. At root, however, we must accept that these salaries are determined by the free market. The same is not true of investment banking.

Even those banks not currently financially dependent on the largesse of the federal government clearly benefit from an implicit guarantee. Governments of every political hue have clearly demonstrated that they are unwilling to let large institutions fail. This enables financial institutions to take risks that a toothpaste manufacturer could not. Bankers took full advantage of this subsidy before the crisis and are starting to do so again.

Humbug watch: Lord Myners

Lord Myners has joined the great pay debate with some pungent remarks urging boards  to rein in executive remuneration. The City minister, who has form in this area having signed off on Fred Goodwin’s monster pension, urged them to disregard the “insidious influence of benefit consultants” when setting pay, and think more about how a CEO’s package related to the salaries of more junior staff.

Warming to his theme, Myners lashed remuneration committees for being “weak and lazy” and signing off on “simplistic” reward schemes (“simple schemes encourage executives to push the risk envelope [and] provide a perverse incentive”). He also called for more transparency in how bonuses were calculated.

from Neil Collins:

Executive rewards: give the shareholders a veto

Do we really want to do something about executive pay? Here's a simple, elegant and transparent way to stop the gravy train: insist that no contract with any director can be binding on a company until it has been approved by its shareholders in general meeting.

The egregious example of Stephen Hester , the man who said that some rewards in banking were "way too high"  reveals the hypocrisy and runaway inflation in the boardroom. This is hardly surprising. The remuneration committee appoints remuneration consultants who dream up ever more exotic rewards, while encouraging candidates to demand them.