Should government-owned banks pay big bonuses?
I have written previously that it was a bad idea for the government to take over banks, but given that they have, they ought to be run in taxpayers’ interest.
A good starting point is UKFI, the UK government’s investment vehicle’s first objective of “maximising sustainable value for the taxpayer, taking account of risk”. So, what would this mean in practice? From the government’s perspective, I must realise that banks play a pivotal role in the economy. So maximising the value and minimising the risk to the taxpayer is very different from if I were I private sector shareholder.
As we have seen, if a bank becomes insolvent in the future, it is likely that government will be unable to resist the temptation to bail the bank out. If you are a private sector actor, you’re loss is limited to the value of the shares. But the taxpayer could have to bail the bank out at any time in the future, bearing the whole loss. So, from this perspective, a government-owned bank should be much more cautious. The reward package should therefore incentivise the senior executives to ensure that the bank is solvent in the future. For example, senior executives could be rewarded through bank loan stock and equity in their pension fund which could not be sold until they retired. That way they have an interest in the long-term prospects of the company, not just short-term shareholder value.
So what incentives have the senior executives of state owned banks, under the watchful eye of UKFI, awarded themselves? The RBS chief executive has been awarded a remuneration package that encourages him to maximise the value of the bank’s shares of the sort that is widely blamed for their collapse in the first place.