Bankers living in a fantasy world when it comes to pay expectations
Governments want banks to behave more like predictable service companies
These post global financial crisis times represent the years of maximum torque and worry for bankers – the realisation that your career was a mistake and from now on it is all a sliding scale of compromise and disappointment.
Bankers are feeling the pain of changes to their remuneration as US regulators and shareholders continue to vilify them as soldiers of Satan – overpaid egomaniacs whose risk-taking culture and entire scope of activities need to be rolled back lest the world suffer another near collapse reminiscent of end days.
Last week, six US regulators – the National Credit Union Administration, Securities Exchange Commission, Federal Deposit Insurance Corporation, Federal Reserve, Office of the Comptroller of the Currency and Federal Housing Finance Agencies – proposed further restrictions on Wall Street pay.
They mandated that United States’ largest banks and financial institutions withhold executives’ bonus pay for four years, a one-year extension from the previous scheme. A minimum period of seven years will also be demanded from the biggest firms to “claw back” bonuses if it turns out an executive’s actions “hurt the institution” (whatever that means). Authorities seem to have concluded that bad bets by financial services firms take longer than three years to materialise.
But the outcome is leading to more onerous changes to the business than just bonus adjustments. Bankers still live in a fantasy world when it comes to their pay expectations. They think smaller bonuses and the risk of clawbacks will eventually be offset by higher salaries. “Making your number”– the amount of savings targeted for their retirement, is becoming an exercise in relativity, because the role of the banker is undergoing irrevocable changes.
Shareholders in Citigroup have also piled into the banker pay battle. Recently, more than a third of votes were cast against its board’s executive pay scheme. The board sought to increase the potential salary package for chief executive Michael Corbat by 27 per cent to US$16.5 million.
Corporate governance advisory groups strongly disagreed with Citigroup’s plan, but it was approved even though 36.4 per cent of votes opposed it. In 2015, the average vote against management regarding pay packages was 8.8 per cent, according to an ISS Corporate Solutions analysis of the 3,000 largest companies in the US. Critics of Citigroup’s pay structure complained that executives were being rewarded generously for underwhelming results.
Restrictive pay policies are rooted in regulators’ lack of confidence in the risk models of banks before and after the financial crisis. During the Lehman Brothers collapse, no one could value their positions. Other banks were equally lost despite all the expertise. The assumption of efficient markets was proven to be nothing more than a self-serving marketing tool when markets failed.
Regulators believe that a culture of unrelenting greed and unbridled risk-taking led by egomaniacal chief executives resulted in a fatally leveraged capital structure across the industry. At every failed bank you can trace the problems back to an arrogant leader who lost his sense of risk sanity.
Anyone qualified to have an opinion would agree that the recent inability of bankers to self-regulate risk and remuneration proved to be more destructive than in any other previous market periods.
Assuming that it is too difficult to prosecute executives, the only way to control risk beyond more transparency is to link adverse risk outcomes and credit failure directly to executive pay. Authorities believe bankers led the US through a spectacle of ingratitude and betrayal that will be not be forgotten by voters.
Banks worry that additional restrictions could worsen the exit of talent. People will leave more traditional banking jobs for sectors where compensation remains unfettered, such as hedge funds and start-ups, including financial technology. Banks and fund managers are already unable to compete with top internet firms when it comes to attracting top business school talent.
Financial technology holds the promise of lowering the costs of clearing and processing. Expert systems might even commoditize the most highly skilled positions. However, banking productivity gains will likely accrue to those in a thin stratum of top financiers, financial entrepreneurs and senior executives.
But regulators aren’t particularly worried that driving unnecessary risk out of banks necessarily means losing top performers. The first step was eliminating proprietary trading. The next was controlling capital risk. After that, banks don’t need the best people any more because governments want them to behave more like predictable service companies than innovators.
Peter Guy is a financial writer and former international banker