DOWN BUT NOT OUT / THE FINANCIAL TIMES EDITORIAL

December 2, 2013 6:07 pm

Down but not out

Bankers’ pay is falling, though not as much as it should

Since the financial crisis, the public on both sides of the Atlantic has fulminated about bankers’ pay. When the world’s megabanks threatened to bring down the global economic system, taxpayers were forced to pick up the bill. Yet, while governments have imposed austerity to pay for these rescues, financiers in the City of London and on Wall Street have continued to enjoy large bonuses and lavish lifestyles.

Research published by the Financial Times today shows that, contrary to popular perception, banks are starting to squeeze pay levels. For the second year in a row, total employee compensation in some of the largest institutions has fallen even though profits have risen. Shareholders – which in the case of bailed out banks include governments – are taking a larger slice of the pie.

Keeping a lid on rewards is not just good PR. It is essential to avoid uneasiness among investors at a time of low profitability. 

Retained earnings are the easiest way for a bank to bolster its capital position. Governments are taking steps to remove the blanket guarantee that banks were able to enjoy in the past. Each institution’s cost of funding will become increasingly dependent on the strength of its balance sheet.

While bankers may chafe at falling pay, their conditions overall remain far from spartan. In the nine banks analysed by the FT survey, the median ratio of pay to profits before compensation was above 50 per cent. In the first nine months of this year the employees of these institutions earnt, in total, $51.4bn.

These figures have implications for public policy. For a start, they offer some perspective in the debate over how much capital investment banks should hold. Bank bosses routinely complain about regulatory demands. They argue that raising the yardstick on capital requirements any further will oblige them to shed more assets. But the numbers suggest that bankers could get by with less without descending into poverty.

Bankers’ high pay is one of the things that makes it very hard for governments to rebalance their economies away from finance – especially in the US and Britain. It is impossible for most other industries to compete with the generous remuneration packages that banking can offer. Of course, bank executives are delighted that they are still able to attract the brightest of the graduate crop. It is much less clear whether this distribution of talent is the best society can hope for.

Copyright The Financial Times Limited 2013.