Compass starts from the proposition that “Out of control rewards fuelled excessive risk taking that brought down the whole economy.” As I have suggested in an earlier blog post, this is highly debatable. I have just been reading the Turner Review, which in March found that “while inappropriate remuneration structures played a role, they were considerably less important than other factors….(such as) inadequate approaches to capital, accounting and liquidity.”
Turner points out that Lehmans’ top managers had invested large proportions of their cash bonuses in the firm, unconsciously foreshadowing the current proposals of regulators and rather undermining the Compass position that there is a simple relation between remuneration schemes, risk-taking and business failure.
Turner’s conclusion was reinforced by the FSA in last week’s report on the feedback to Reforming remuneration practices in financial services. Some respondents to their consultation pointed out that there was in fact very little, if any, empirical evidence that remuneration schemes directly caused the crash. Have readers seen any? The FSA see bankers’ pay as a “contributory rather than a dominant factor” – which begs the question about why they find it necessary to impose a raft of new rules: presumably because of political rather than economic imperatives.
Of course Compass uses the financial crisis and consequent anti-banker sentiment to demand a much wider range of intervention in firms’ pay. Reference is made by one supporter to current differentials “erod(ing) the bonds of common citizenship” and “undermin(ing) the principles of equal opportunity and the recognition of equal worth.” The campaign wants a maximum ratio of CEO pay to that of the average employee in all large firms, and higher taxation on bonuses.
I am as always perplexed in this debate, however, by the absence of reference to individual high earners in areas such as sport, entertainment, the legal profession and so forth. They must constitute at least as large a group of rich people as the CEOs of banks or even FTSE companies. Would a High Pay Commission be invited to deal with them as well? If so it will have its work cut out. Is Sienna Miller worth more than John Terry? Should Sienna’s pay be capped at a multiple of the second assistant focus-puller? Should John’s salary be no more than twenty times that of a youth team player? Discuss.