Bankers' bonuses are once again in the news. In the UK, there is a fierce debate about how banks that have received huge financial support from the taxpayer (which is now a major shareholder in several and the ultimate guarantor of the others) can possibly justify paying huge bonuses to 'star' performers. After all, the logic goes, the taxpayer funds were intended to rescue the banking system, and with it the entire economy, not to reward the same people who had caused the problems in the first place.
While the City regulator, the Financial Services Authority, has published a pay code proposal to try to curb the worst excesses, some parties have condemned this as not going far enough. The UK government is now making dark threats about legislation being introduced.
ACCA has always argued that failure in institutions to appreciate and manage the connection between the risks inherent in their business activities and remuneration incentives was a key cause of the financial crisis. Pay structures and bonuses of banks were characterised by short-term goals, which neither supported prudent risk management nor worked in owners' long-term interests. This has to change, and methods found to link bonuses with sound long-term performance, not short-term gambles.
But we do not believe new laws are the answer. In our recent report The future of financial regulation, we argue that 'in the main, decisions about remuneration policy should rest with the company's board, which will be in the best position to decide whether its plans are affordable and in the company's interests. The levels of remuneration and bonuses paid by a company should only be a matter of concern to the regulatory authority to the extent that they have an inherent potential to distort the business practices of the company'. Good micro regulation will intervene where leverage is building up dangerously or unsound pay policies being adopted by institutions.
The other danger of a legislative (or exaggerated regulatory) crackdown in one country is that mobile financial institutions will simply shift to others. ACCA has urged G20 countries to co-ordinate their post-credit crunch regulatory overhaul to minimise arbitrage, but this will never be a complete answer. The UK, along with many western countries, enjoyed the credit boom of 1997-2007 which, along with trade imbalances, ultimately did more to create the crisis than any other factor. Lashing out at City bonuses may win popular support but the real challenge is to instil genuine ethical cultures, not only within businesses but within wider society.
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