Phillip Lane, departing governor of the financial regulator, the Central Bank, wrote a farewell letter to the government calling for the cap on bank bosses’ bonuses to be lifted. The CEOs of the Irish state owned banks are paid a max of €500,000. He thinks they deserve more. I believe that if the government does lift the cap on bankers’ bonuses, you will be seeing a pivotal point in history where financialisation will again be unleashed on the real economy to extract excessive profits and to destroy many fine businesses and individuals.
We Irish should have learnt this lesson already with the Crash of 2008. But financialisation is powerful and insidious and is already rearing it ugly head with excessive pay in many banks abroad. Ireland had the worst crash in the world. The bailout of the 6 private Irish banks cost the taxpayer €64,000,000,000. To put it in context, €64bn was almost more than two years total tax revenue in 2009.
Do You Really get what you pay for?
The argument is that top managers are so hard to get and retain that we must pay them huge salaries bonuses and other remuneration or they will leave. It is the rule of the market.
In a Rigged Market?
But the market for top executives is rigged. In the US top executives earned 30 times the pay of average workers in 1978 and the economy was doing well, but by 2014 it had risen to 300 times. Companies did not perform better after the rise and many would argue convincingly that many, especially banks, performed worse. The Crash lead to some Regulation again which tamed financialisation a bit, but the top elite are still in harness. The pay ratio has fallen, slightly, to 271 times today.
The manner in which the market for top bosses remuneration is rigged is that the top bosses collude to pay themselves excessively. They are a small, mainly male, group who sit on each other’s boards (as TASC showed in Mapping the Golden Circle in 2010). Their bonuses and other so-called incentives are also rigged by the friendly remuneration consultants who know exactly what they are expected to say.
In fact there has been a inverse relationship between top remuneration and many companies’ performances in recent years, internationally, with poor and appalling performance and excessive remuneration. There is even rising criticism of top bosses pay from many corporate investors.
Nowhere has the inverse relationship been more clearly demonstrated than here in Ireland where all six private banks - whose bosses were paid excessively and the banks collapsed. For example, in 2006, the 13 non executive (part-time) directors of Bank of Ireland (BOI), were paid €80,000 each. These directors included a former government Minister, Ray McSharry and a former Secretary General, Paul Haran.
In contrast, the board members of commercial state companies were paid €15,000 each that year as is still the case today (which is too little, in my view). Furthermore, in stark contrast to the performance of these banks, one state company paid dividends of €1.4bn to the taxpayer in the past decade. What was this vast sum used for? In part to help pay for the debts of these private banks!
The deputy governor of BOI, Denis O’Brien was paid €124,000 and the Governor, Mr Burrows, a staggering €336,000. The CEO Brian Goggin was paid €1,919,000.. The CEO said “2006 was a year of strong profit growth for the Bank of Ireland Group” (AR, p6). They paid out a dividend of €511m! The “independent” auditors were PWC.
In 2007, AIB’s annual report (p161/4) showed a bonus of €1.3m for the CEO Sheehy just before its collapse. In total, he got €2.1m in remuneration, with three others executives sharing well over a €1m each. The 16 part-time, non-executive directors fees ranged from a mere €50,000 for one poor fellow to €153,000 for another, with Chair, Dermot Gleeson granted fees of €475,000. The “independent” auditors were KPMG.
An Impact of High Bosses Pay
A couple of years later both banks went bust wiping out all shareholders and almost the state. The certified profits and valuations of the banks were wrong. It was not just the banks’ shareholders who were wiped out, but it deeply impacted on Ireland. Had the banks been prudent and cautious as banks should be (which includes pay), the bubble and bust would have been much less destructive.
Do we want to repeat this fiasco? To argue that bank bosses should be paid more than the cap of €500,000 may lead to their collapse again. We must learn from recent history.
Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions. He is a member of the Economic Committee of the ETUC and chair of TASC’s Economists’ Network. He was a President of the Statistical and Social Enquiry Society of Ireland, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.