Can higher capital standards cause lower pay?

By Felix Salmon
September 3, 2009
Robert Peston is skeptical that the Brown/Sarkozy/Merkel plan to restrict bankers' pay is either workable or a good idea.

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Robert Peston is skeptical that the Brown/Sarkozy/Merkel plan to restrict bankers’ pay is either workable or a good idea.

It’s pretty difficult to put a lid on pay in the wider financial industry, especially a globalised one.

Remuneration in finance is like a blancmange. If government and regulators squeeze one part, it will bubble up somewhere else.

If big banks are restricted in the cash rewards they can pay their top staff, they will reward them in other ways – with increased pension contributions perhaps, or cheap loans. Or they’ll pay a fortune to the best ones by hiring them on rolling short term contracts, to keep them off the official books.

He’s basically right — which is why the Europeans might be interested in the Geithner plan (warning: 14-page PDF) to impose higher capital standards on systemically-important banks.

The insight here, I think, is that the biggest banks — Goldman Sachs, Morgan Stanley, Merrill Lynch, etc — are the price-setters when it comes to banker remuneration. If they are socked with higher capital ratios, then their profitability will fall, their bankers will be paid less, and prevailing remuneration expectations in the industry as a whole will decline accordingly. Which would be a most welcome development.

6 comments

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The problem is that no one in the financial services industry believes in any way that they need lower pay, or need to be a smaller part of the economy. Quite the opposite. Unless the participants believe that they have a problem, we will maintain the status quo.

Posted by Curmudgeon | Report as abusive

Don’t higher capital ratios actually increase the rewards to individuals and firms that can figure out a ways to circumvent them?

Higher capital ratios should be implemented over a 2-5 year plan, systematically exacting the increased cost as financial systems rebuild / replenish / renovate themselves, in the US and Europe.

If salaries are not high enough, then all them wizened bankers will find better pasture elsewhere. But not all of em can…I highly doubt they would all find it so

Posted by Griff | Report as abusive

The whole point of propping these entities up is to recapitalize them, no? And the core problem is that these are historically partnerships, and the key employees expect a big payout from profits every year, even though they now have outside shareholders and debts to Uncle Sam, yes?

Well, as I’ve said before (really) you can’t recapitalize a kleptocracy. At least not for very long.

So why not have a provision that caps total compensation for the top 50% of employees of the TARP banks at X percent of the take? For example, 60% of 2008 top 50% compensation plus 30% of net earnings before comp costs? (people with more experience of the industry can set the ratios).

You limit the pie, putting more onto the SH/creditor side and less on the highly compensated employee side – and you put in a hard cap to make sure that the fighting is not employee versus SH/Creditor (who are not in the room) but employee versus employee.

And make it universal to all banks supported by TARP, or any bailout anywhere. Let them move to China – if it’s that important to them….

Posted by Dollared | Report as abusive

You right this post as if the goal is to decrease renumeration: the goal should be to improve financial intermediation and remove incentives that distort the pricing of risk, while reducing the probability of a severe “macro event” and the cost of such an event

Posted by Sam | Report as abusive

nope, i think that hedge funds set market rates for renumeration.

Posted by q | Report as abusive