We ask industry experts....
Under what circumstances is it acceptable to curb pay in the financial sector?
David Norman, managing director and co-founder, TCF Investment
Pay should be related to value being created (and ideally value for customers). Thus at any time when value is not being created then a curb is acceptable. There are still too many examples of pay for ‘turning up’ rather than pay for value add. Fund management is an interesting case study: performance fees (managers’ pay) seem most often not to be aligned with customer value creation – largely because the base fee before performance added is too high. The manager can only win.
Total Expense Ratios for retail mutual funds have risen over the past 10 years despite the fact that industry scale has doubled (similar trends for investment trusts are emerging) – that means the customer is being charged more for an industry doing less. That is not fair.
Too many active managers do not deliver consistent returns in excess of benchmark and fees, so while they may create value for shareholders they destroy value for customers/investors. They should have a pay curb.
Pay should ideally be aligned with customer value/interest. Currently we seem a long way adrift from this – the customer risks their capital and the manager takes the revenue regardless of success.
The active/passive debate is starting to expose some of these issues – passive is lower cost and should drive out the poorer active managers. But the average fees (pay) of managers in the UK are much higher than the US (active or passive).
The lack of truly independent boards, the lack of real transparency of fund costs (trading, custody, broking etc) and an apparent lack of regulatory interest suggests that no pay curb is likely anytime soon… poor, old investors (literally).
Patrick Ingram, financial controller, Parmenion
Never! But that is never when we define ‘pay’ as how shareholders, under a scheme of corporate governance, with performance assessment and on a judgment of what is financially prudent, want to reward someone. And when ‘curb’ means government intervention to answer calls from the media and consumer protection groups. If we let politicians set ‘modesty limits’ to financial services pay, just like the £20 a week cap on footballers’ wages in the 1950s, we will encourage cheating. Pay in financial services is curbed automatically. If your business fails, you get nothing.
This question arose following public anger at the financial crisis. It reflects shifts in our expectations of ourselves and of our politicians. The financial crisis was preceded by an economic boom that tripled the real wealth of the country, vastly increased property values, reduced the real cost of consumer durables and food, and flooded the public services with cash.
Remember the cost of a computer in 2000? Or flight costs before budget airlines? In pumping up this massive head of steam, politicians misjudged the risks they were allowing to surge through the system, hoping to “take the credit” so to speak. Everyone likes to offload responsibility. Bankers and any other financial salesman are obvious targets. What do they add to the real economy? But who manages the economy? The politicians’ paymasters, that is you and I, must remember to hold them to account.
Gary Reynolds, director and CIO, Courtiers
Pay restrictions never work. When they are introduced the only people that benefit are the consultants that are paid for breaking them. The UK public is, quite rightly, upset by the actions of certain people and companies in the financial services sector, and amongst the banks in particular.
The bully-boy tactics of Dick Fuld at Lehman, the incompetent strategy of Adam Applegarth at Northern Rock and the expansionary policies of the boards of RBS and BOS, which saw the ascension of their banks as a method of gaining Scottish economic independence, were all unacceptable. But capping these executives’ pay would not have prevented the catastrophic outcomes.
For that you need more engagement from shareholders, more transparency and a smart regulator that understands the process of financial intermediation in the economy.
We need to move on. “Banker-bashing” will not repair the damage and employing even more civil servants to structure pay policy for our financial institutions will simply add to an already bloated public sector.
Let’s all remember that we are better having well-paid bankers working from London, paying their taxes and helping to cut the national debt rather than them flying off to some enticing tax haven and doing exactly the same from there. Curbing pay in any sector of the economy is never, ever acceptable.
Anita Skipper, corporate governance director, Aviva Investors
Getting straight to the point, it is now a good time to start curbing pay in the financial sector. It is a completely acceptable course of action when inappropriate pay leads to risk taking and the creation of dangerous products that no one understands but it pays to create them and sell them. Likewise, when excessive pay leads to huge rewards for taking the short term view without any comeback if it all goes wrong.
It is unacceptable that the risk taking requires the public to bail these companies out and when these high earners are so ungrateful they still think they deserve what they were paid before. And it is really wrong when the quantum of pay is so huge that the general population finds it totally unacceptable (especially when they have bailed out the sector).
However we need to distinguish between the responsible and the irresponsible. The financial sector has a huge array of very different companies, from banks, insurance companies, asset managers, hedge funds to private equity, IFAs etc. Many just earn an honest living. Some parts of the financial sector are even socially useful and most of us can identify those whose pay should be curbed.
Abigail Herron, corporate governance manager, The Co-operative Asset Management
Failures in the financial sector have raised public awareness of corporate governance issues, in particular the remuneration packages of senior executives. Therefore, while some investors have maintained a consistent approach through bullish and bearish periods, many have had to re-awaken their responsibilities to scrutinise the role of remuneration committees.
We recently carried out a study comparing financial sector companies against other sectors. It found discretionary payments and undesirable employment contract provisions, for instance, guaranteed bonuses and golden hellos were much more prevalent in the finance sector. Therefore, despite a public outcry, boardroom pay continues to grow excessively in spite of a “heads I win, tails I win” approach to pay being an important factor in the financial crisis.
Remuneration consultants and committees need to exercise restraint in designing and approving pay packages for executive directors and ensure that the link between pay and performance is robust and transparent.
Equally, investors need to scrutinise and engage with their investee companies and consider if senior executives are being incentivised in a manner which is to the long term benefit of the companies they are running. Both parties need to make themselves available for dialogue to avoid draconian measures being imposed such as the strict new EU rules restricting bankers’ bonuses that require 40%-60% of bonuses to be deferred for three to five years, as well as half of any up-front bonus to be paid in shares or in other securities linked to the bank’s performance.
