Connected Research

Union policy research in the 21st century

Archive for the ‘Corporate governance’ Category

Cameron on public sector pay

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As part of an attempt to portray his party as a ‘radical’ party, ‘Call me Dave’ Cameron is looking at linking the pay of public sector executives to the pay levels of the lowest paid in the organisation: pay at the top should be no more than twenty times pay at the bottom, as part of an initiative on ‘fair pay’.

Two points, really:

1. there is no private sector ‘authority’ for doing this, as Cameron’s article appears to claim: there may well be ‘some’ private companies that operate similar practices but let’s not kid ourselves that the private sector is setting a lead here: it isn’t. We can all cite one or two, but I’d challenge Cameron to use two hands to count the numbers of private sector companies that actually use such multiples.

2. pay levels are actually more compressed in the public sector: the lowest paid tend to be paid higher than their counterparts in the private sector; the private sector pays better for those with higher education and degrees. So, the differential between high pay and low pay is much less in the public sector than it is in the private sector, where the need to tackle unfair pay is, therefore, much greater.

Is that a vote for a high pay commission then, Dave?

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Written by Calvin

09/04/2010 at 11:11 am

Tobin, updated

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The Tobin Tax was first proposed by Nobel Laureate economist James Tobin in 1972 as a levy designed to deter currency speculation (although he was building on the wider financial transactions tax proposed by Keynes back in 1936). Some sort of financial transactions tax has been back on the political and economic agenda in recent times as a way of dealing with one aspect of the conditions which have led to this last economic crisis (and, frankly, as a means of getting the bankers to pay (back) their share). The wiki entry on the Tobin Tax is good on the background and the recent history.)

An updated Tobin Tax, updated for the modern times and renamed the Robin Hood tax has now been proposed by a coalition of around 50 organisations dealing with poverty, including the TUC, as a way of raising funds from banking activities towards dealing with poverty and climate change, both in the UK and abroad. The campaign features a video produced by Richard Curtis and starring Bill Nighy – and, of course, you can sign up for updates and vote (more than 4:1 in favour, so far, now that stacks of multiple ‘no’ votes have been discounted), too. ToUChstone, the TUC’s blog, has produced several posts on the initiative today as, from a capital markets perspective, has labour and capital.

[Edit 15 February: now a margin of 10:1 in favour – while the multiple ‘no’ votes appeared to have come from two IP addresses, one of which is registered to Goldman Sachs, that Great American bubble machine. Doing God’s work again, Lloyd?]

The Connect Sector of Prospect has a policy of raising awareness of and support for the Tobin Tax dating back to 2001 and this blog supports also the updated initiative: it’s another aspect of a welcome return to Keynesian economic views; in deterring short-termism, it may well have a role to play in improving (long-term) corporate governance; the activities the target of the tax are those which fit well within the definition of being, in Adair Turner’s neat turn of phrase, ‘socially useless’; and the funds it will raise ought clearly to help with the worthwhile central mission of the coalition.

Without going into all the arguments of the naysayers, some of which are less worthy than others, it seems to me that, to be successful, the initiative needs to recognise the following:

1. this is not a cheap way of raising finance to meet long-term UN goals of all countries providing 0.7% of GDP for international assistance – it has to be extra

2. this is not a way of providing bankers with a route back to social acceptability, and neither does it deal with the behaviours which caused the crisis and the need to inject huge amounts of capital to bailing out the banks – both of which are issues which need to be properly tackled. Nevertheless, we do need to understand what role (very) short-term trading plays and why those engaged in it do it, given the tiny margins being quoted; at the same time, the tax needs to target what is demonstrably ‘socially useless’ activity undertaken within the financial services sector – and this itself needs to be cut off. The City needs to recognise this, too, much more than it does.

3. the potential for City creativity needs to be recognised and the issue of accountability to pay the tax properly covered

4. the monies need to be properly ring-fenced and used for specific goals. What can’t be allowed to happen is that money raised and sent overseas then finds its way back to this (or any other western) country in carbon trading schemes.

Overall, however, an initiative well worth supporting.

Peston on bank bonuses

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Ahead of tomorrow’s questioning of Royal Bank of Scotland Chief Executive, Stephen Hester, by the Treasury Select Committee, Robert Peston has a few choice questions of his own, to whit:

1. What proportion of investment banking profits can be put down as an exceptional windfall?

2. Given that bonuses are discretionary, on what basis have banks decided to pay record amounts to some executives?

3. Are investment banks as dependent on the skills of particular individuals as they think?

Have investment bankers in the world’s five ‘leading’ investment banks, reporting over the next two weeks, really earned $65bn in salary and bonuses for 2009 (a sum bigger than the economies of some EU member countries)?

(Oh, sorry – that was the rhetorical question.) As Nigel Stanley points out over on ToUChstone today, boardroom pay is now ‘well beyond the rational’. Given that the Chancellor’s temporary bank payroll tax is likely to realise – even at expanded levels – some £2bn (a sum which it would be useful to ring fence around a particular stated social use, by the way), the ease with which such a sum could be absorbed by corporate plc illustrates the need for further action on out-of-control pay. (Remembering that the purpose of the tax was to tackle the reward culture that pays out bonuses for excessive risk taking, a likely take some four times the original estimate of £550m (p. 117) has clearly some way to go to achieve its aim.) Even the FT is arguing for some regulation of [finance industry] bonuses where these are paid out by under-capitalised institutions (hat-tip: Tom). So, once again: a high pay commission, anyone?

Written by Calvin

11/01/2010 at 5:32 pm

How much is your job worth?

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The new economics foundation has today published a provocative document looking at the real value to society of a range of different professions in the attempt to explore issues around how our pay relates to ‘worth’ as well as the inter-relationship between the work that we do and the impact on wider society.

The report compares six professions and ten ‘myths’ about pay and work and, while it won’t surprise (given its stated purpose to ‘shatter some myths about work and value’) that nef’s methodology delivers some justification for Adair Turner’s views of the ‘socially useless’ nature of large swathes of banking activity, nor that cleaners and waste recycling workers are engaged in work that is far more socially useful, the report nevertheless produces some highly interesting points for policy-makers. Its central conclusion, that:

We urgently need to align incentives with the social and environmental value that are generated by the workforce,

is one that (with an appropriate grammatical correction!) needs further promulgation in a world in which pay is set at one end of the market by peers and, at the other, by a race to the bottom driven by the need to make savings on outsourced contracts, whether in the public or the private sector, and where work is dominated by vulnerable workers rather than ones which share a belief that they are ‘masters of the universe’.

The difficulty that remains is that, in a privatised, globalised world, where issues including wages have been handed over to the frequently distorting hand of neo-liberalist perspectives, reining market-induced excess back in again demands intervention and regulation and will increasingly demand internationally-co-ordinated action. Difficult things to achieve in practice and ones that are likely to require clear and concerted explanations if they are to be ‘popular’ in action, and not just on paper in individual opinion polls.

Nevertheless, the report is a timely one in that, in a post-crisis world, priorities will have to be set for public finances; having a framework for why public services need to be maintained, why there is a need for a commission to explore high wages and why decisions have been made over taxation policy, to name but three examples, is an essential first step in setting out why such priorities have been set – and indeed, why they are important. It is also likely to require a government that has confidence about its decisions.

Written by Calvin

14/12/2009 at 4:56 pm

Bankers’ bonuses (again)

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Apart from Copenhagen, today’s major news stories all feature this week’s much-anticipated Pre-Budget Report.

Significantly, Chancellor Alistair Darling is considering including a ‘crackdown’ on the bonuses of highly-paid City bankers in his PBR speech, via a windfall tax, after apparently having dismissed a windfall tax on banking profits themselves as likely to jeopardise the strengthening of banks’ balance sheets. Larry Elliott in The Guardian summarises the economic and historical case for such a tax, while William Keegan, his colleague over at The Observer, also provides some interesting political context for longer-than-short-term hopes that a revived manufacturing industry (hopefully including, as Elliott argues, a large element of green investment) might take the place of the recent economic over-reliance on the financial services sector.

At the same time, the Engineering Employers Federation, making its own pitch to the Pre-Budget Report, points out that confidence remains fragile even if a recovery is in sight while leading economists have written to the FT to point out that, in this context, public spending cuts will undermine the recovery – a sentiment well in tune with the TUC’s Brendan Barber’s own thoughts on the PBR yesterday and specifically welcomed by him today.

Regardless of its evident populist appeal, a punitive tax on the bonuses of bank executives remains the right thing to do in the context of the banking profits on which such bonuses are proposed having been made on the back of taxpayer-funded bail-outs and on the impact of the Bank of England’s quantitative easing programme. It does, clearly, need to be sufficiently robust to circumvent City creativity (not least to allow the tax to follow bonuses awarded in respect of this financial year but paid in future ones, or in shares), and to be on a sector-wide basis so as to prevent poaching by other financial institutions. Nevertheless, the practical difficulties inherent in a particular policy are rarely sufficient to undermine whether or not it is right to implement it. Darling will evidently need to define the tax carefully – but if it encourages banks to pay smaller bonuses, then it will have done its job. It is, ultimately, a question both of accountability and of legitimacy; in forcing financial institutions to confront the legitimacy gap in what they are proposing on bankers’ bonuses, Darling will be doing democratic values a favour, too.

Written by Calvin

07/12/2009 at 5:00 pm

Some big (and some not so big) numbers

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1. £850,000,000,000 – the cost of taxpayer financial support for an otherwise collapsing banking sector assessed and detailed today by the National Audit Office. The actual amount committed so far is actually £131bn – the rest will fall due if it all gangs agley (again) and the sheltered assets need the protection of the guarantees staked on them. Which it won’t, because of big number No. 2:

2. 5,000 – the number of senior executives working in the banking sector which Lord Myners told the House of Lords yesterday are likely to receive a ‘remuneration package’ this year of £1,000,000 (or more): clearly, such awards must mean that everything is rosy in the garden again. Myners is writing to the NAPF, the CBI and the TUC to ask them to use their influence to persuade fund managers to stop these ‘unreasonable and unjustified levels of remuneration’. Nils Pratley in The Guardian today is calling for a windfall tax on executive bonuses.

3. 5p in the pound – what creditors of Farepak, including ordinary families who had committed an average of £400 in hard-earned cash, and some over £2,000, received (starting from October 2009) following the collapse of Farepak (in October 2006) after some ill-advised financial engineering following which HBOS (oh yes) called in the company’s overdraft. The commercial fund set up to support Farepak creditors, including families, raised just £6m – far short of what was anticipated and likely to have provided an earlier (additional) sum of just 15p in the pound.

A windfall tax on (at least) £5bn (though not all of this is bonus) is likely to raise a substantial sum, provided it is set at a punitive level. I can think of some worthwhile uses for it, too.

Written by Calvin

04/12/2009 at 12:50 pm

RSA report illustrates impact of pensions management costs

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Pensions for the people: addressing the savings and investment crisis in Britain, a report by David Pitt-Watson, founder of Hermes Equity Ownership Services, for the Royal Society of Arts highlights (among other things) the effect on pensions pots of annual management charges.

The report starts from the perspective that the investment chain is currently failing as a result of high investment management costs and inadequate corporate governance and makes proposals for how these can be addressed within the framework of the government’s pensions reforms. As Pitt-Watson points out, the imminency of the reforms – starting in 2012 – as well as signs that the opposition is currently reviewing its policy on them adds to the urgency with which the problems he highlights must be addressed.

Certainly, the running costs of private pensions are little understood. Pitt-Watson points out that the annual fees charged to a private pension is somewhere in the region of 1.5% of the total balance of the fund in each year (the Pensions Commission calculated slightly lower, at 1.3%). This means that, over the course of the average lifetime of a pension, some 40% of the total pot goes into costs and charges, meaning a hefty reduction in the size of the annual pension that such a pot will secure: Pitt-Watson’s calculations suggests a reduction from an annual pension of £16,080 (in the unrealistic scenario of there being no charges at all) to one of £9,901. In contrast, a pension of £13,657 could be achieved at a cost structure of 0.5% and one of £14,756 at 0.3% – a significant increase in return for no more investment by the individual pensions beneficiary concerned and with a knock-on effect on the extent to which future generations of retired people are going to be reliant on the state.

So, it is clear that personal accounts must have low charges – and also that employees with DC schemes more generally ought to pay much more attention to the cost structures charged to their schemes.

Through auto-enrolment, much of the on-costs of marketing and product set-up are taken out, meaning that personal accounts can be established on the basis of a much cheaper cost structure. The Pensions Commission suggested that an annual management charge of 0.3% was achievable; the government’s response agreed that it may be possible to achieve an AMC at a rate of 0.5% of funds invested in the short-term and below 0.3% in the long-term.

Pitt-Watson’s suggestion for citizen investor funds – to tackle the corporate governance inadequacies – have similar cost structures underpinning them but he does suggest increasing the £3,600 maximum amount that can be saved in personal accounts – a proposal which the TUC has also previously supported. This he suggests would facilitate the creation of collective investment vehicles of sufficient scale that would essentially entail the creation of major new market players committed to good long-term corporate governance.

With the government having previously suggested that the attainment of a replacement rate of two-thirds of income could be achieved within the £3,600 annual limit on contributions, the personal accounts system may not see the establishment of pensions institutions of the sorts of scale that Pitt-Watson is seeking as regards the corporate governance aspects of his report, but continued industry support for lower cost structures is the one that will deliver the most practical benefits to ordinary pensions savers.

Written by Calvin

28/09/2009 at 2:26 pm