Connected Research

Union policy research in the 21st century

Posts Tagged ‘Executive remuneration

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

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

The recession and middle Britain’s shrinking wages

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The TUC has published a ToUChstone pamphlet – the first in a new series – exploring the role of the declining share of wages in national wealth and the much less well-known role this has played in the recession (see TUC press release).

The author on behalf of ToUChstone – Stewart Lansley – also wrote the earlier work on middle income Britain (blogged here) which documented the rise of an onion-shaped distribution of wealth in the UK and the rising divide between an affluent 40% and the bottom 60%. In this new report, he focuses in more detail on why middle- and lower-income Britain has been left ‘in the slow-lane of rising prosperity’ (a theme also picked up in The Guardian‘s Comment is Free pages today, although seemingly rather obliviously to Lansley’s work).

In his blog post for ToUChstone introducing the pamphlet, Lansley highlights that wages held steady at around 60% of national output for much of the twenty five years after 1945, before rising to 65% in 1975. Now, however, they account for 53% – a fall mirrored elsewhere: more steeply in the US, more shallowly in continental Europe – as a result of the erosion of employment rights [here Lansley is kind to his hosts: trade union weakness in general terms is also a factor], as well as reduced demand for unskilled labour and the transfer of jobs triggered by globalisation. All of this has contributed to boosting the bargaining power of employers which has had the effect of wages falling behind productivity growth – the wage squeeze.

The effect is that families borrow more to maintain living standards – staggeringly, households borrowed an average of 45% of their income in 1980 but 157% in 2007.  Of course, individual choice is an aspect here, but the wage squeeze implies that, formerly, such a level of living standards were financeable from wages whereas this is currently not the case. At the same time, rising company profitability – the counterpart to wages falling behind productivity – flowed into justifying record dividend payments and an explosion in executive remuneration, while higher rates of return in financial engineering led to the replacement of funding for long-term success with money being moved around specifically to chase the quickest return. This, in turn, lays behind the other, more well-known, factors in the current crisis.

The policy conclusions are not only that cuts would end a recovery before it has properly begun – since wages fuel spending – but that, in the long-term, the share of wages in national output needs to rise again.

Clearly, this latter is much easier said than done. Essentially, we need to confront and overturn a thirty-year orthodoxy which, albeit incorrect, has led to a major weakening of, and support for, the institutions capable of delivering that level of confrontation. It means essentially that people need to adopt a much greater degree of solidarity with and for each other, and reducing the importance of self (and self-interest) in doing so. Twelve years of Labour government, despite some important initiatives and an awful lot of warm words, has done little to change the increasing individualisation which lays behind the policy initiatives of the previous twenty. Challenging that orthodoxy clearly needs to take its place in a proper consideration of economic alternatives and Lansley’s pamphlet certainly helps to inform the debate here. Nevertheless, we should recognise not only that this sets out a specific challenge for trade unions (and, indeed, their members) but also that the scale of that challenge is significant.

Written by Calvin

12/11/2009 at 7:16 pm

Adair Turner – FSA heretic

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Selected extracts from Adair Turner’s Mansion House speech given last night:

…Hundreds of thousands of British people are newly unemployed; tens of thousands have lost houses to repossession; and British citizens will be burdened for many years with either higher taxes or cuts in public services – because of an economic crisis whose origins lay in the financial system, a crisis cooked up in trading rooms where not just a few but many people earned annual bonuses equal to a lifetime’s earnings of some of those now  suffering the consequences.  We cannot go back to business as usual and accept the risk that a similar crisis occurs again in ten or 20 years’ time.

We need radical change.  Regulators must design radically changed regulations and supervisory approaches, but we also need to challenge our entire past philosophy of regulation…

… not all financial innovation is valuable, not all trading plays a useful role, and … a bigger financial system is not necessarily a better one. And, indeed, there are good reasons for believing that the financial industry, more than any other sector of the economy, has an ability to generate unnecessary demand for its own services – that more trading and more financial innovation can under some circumstances create harmful volatility against which customers have to hedge, creating more demand for trading liquidity and innovative products; that parts of the financial services industry have a unique ability to attract to themselves unnecessarily high returns and create instability which harms the rest of society…

… So the FSA, on behalf of society, must consider whether the financial services industry is delivering its vital services in an efficient and risk-controlled fashion… [This]… impl[ies] an important and profound shift in regulatory philosophy…

… It does mean that the top management of banks… need to operate within limits.  They need to be willing, like the regulator, to recognise that there are some profitable activities so unlikely to have a social benefit, direct or indirect, that they should voluntarily walk away from them.  They need to ask searching questions about whether the complex structured products they sold to corporate and institutional customers, truly did deliver real hedging value or simply encouraged those institutions into speculative and risky exposures which they did not understand: and, if the latter, they should not sell them even if they are profitable.  They need to be willing to accept the capital and other requirements which will be imposed on activities of little value and considerable risk, rather than deploy lobbying power to argue against such constraints on the basis of a simplistic assertion that all innovation is always valuable.

Powerful stuff.

The regulatory reform Turner spoke of refers to a number of issues:

– a requirement for the global banking system to be more prudent and to operate with larger shock-absorbing buffers of capital and liquidity

– the imposition of much higher capital requirements against many riskier trading activities and a bias towards conservatism in the capital requirements for trading in complex and potentially risky products where the benefit to the economy is unclear.

– a far more assertive style of supervision, no longer willing to assume that market discipline and incentives will always lead bank management to make optimal decisions and one more willing to make judgements on whether business models and business strategies create undue risks for the whole financial system.

Perhaps a quiet, rather than profound, still less radical, reform.

Nevertheless, Turner also had words to say about banking bonuses, reminding his audience that new FSA rules require remuneration committees to make a key part of their consideration the risk consequences of remuneration structures and of the need to get these structures right for the long-term. In particular, banking bonuses need to be consistent with the priority of using the extraordinary profits now arising to rebuild the system and, that, long-term regulators will have a ‘legitimate interest’ in aggregate bonus payment rates ‘if and when these payments have implications for capital conservation’. So, banking bonuses are also part of the reform programme.

Turner appears not to have been carried out to Smithfield and burned but the level of apoplexy in the room at his address and the issue of reform can be imagined. But, at the very least, kudos to Turner for entering the lion’s den and reminding people that, ahead of the G20 meeting later this week, far from a return to ‘business as usual’, much of what bankers do remains contestable in terms of public policy.

Written by Calvin

23/09/2009 at 12:09 pm