Tuesday, October 20, 2009

How Much Should Bankers Get Paid?

Readers Question: Should Government Prevent Record Bonuses to Goldman Sachs and Staff of Bailed Out Banks Like RBS?

Goldman Sachs, the US investment bank which employs over 5,o00 people in London, will pay an average bonus of £500,000 this year. Like many of the remaining investment banks, Goldman Sachs have made huge profits this year.

It is claimed RBS is also intending to pay large bonuses to staff, even though RBS was bailed out by the Government. However, RBS claim any bonuses will have to be approved by UK Financial Investments, the company managing the governments 70% stake.

Why Are Banks Paying Such High Salaries?

  • The Banking sector has become more profitable this year. This is partly due to the decline in competition as banks have been merged or folded. This decline in competition enables them to make higher charges.
  • Banks claim the wages are a reflection of the workers worth to the firm. They argue, they need to pay high wages / bonuses to the best bankers otherwise they will struggle to get the best workers.

Arguments for Restricting Bankers Pay

  • The banking sector only survived because of government intervention / bailouts and implicit guarantees. Therefore, the taxpayer has a right to intervene in the industry it saved.
  • There is a sense of injustice that bankers who caused the crisis are benefiting from huge payouts, whilst many workers are being made unemployed.
  • Excessive Bonuses were a contributory factor in creating a risky banking environment which led to the credit crisis and subsequent recession. See: Problem with bank bonuses
  • Bank Pay partly reflects the greater monopoly Power that banks now have
Arguments Against Restricting Bankers Pay
  • It may seem unfair that bankers get so much pay, but, if firms are willing to pay that amount, then it is an indication that according to free market principles they are worth the wage.
  • Banker Pay is not the real issue. Arguably the government need to concentrate on regulating lending practises. Cutting Bank bonuses are just a populist measure which does nothing to create a better / more responsible banking sector.
  • Banks will find a way around. If British banks can't attract the best workers, it will benefit foreign competition which will be able to attract the star investment bankers.
  • The government / taxpayer will benefit through the collection of income tax at 50% on bank bonuses; these bonuses will help refill the treasury coffers.
Conclusion

The public's anger over bank bonuses is more than just populist anger. Excessive bonuses were a problem behind the credit crisis. The idea banks need to pay £9m to attract star bankers is somewhat thin. Are these the same star bankers who predicted the current crisis and suggested responsible lending practices? I doubt it.

Banks may say it is unfair for the government to intervene in setting their wages. But, is it not unfair the taxpayer had to bailout the irresponsible banking sector? Government intervention can't just be a one way ticket. If you need the taxpayer to bail you out of a crisis, you can hardly blame the taxpayer for wanting to limit excessive pay.

Yet, limiting bank pay is not the real issue. Cutting bank bonuses may make the public feel better, but, it will not, by itself, create a responsible banking sector.

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