Contrite bankers starting to pay for past excesses

ANALYSIS:ANOTHER DAY, another contrite banker. Citigroup chief executive Vikram Pandit yesterday told US congressmen he would take a salary of just $1 (78 cent) and forgo bonuses until the embattled bank returned to profitability.

Pandit’s move follows the “profound and unqualified apologies” offered by British bankers the previous day.

Addressing a Westminster committee, Sir Fred Goodwin and Andy Hornby, former chief executives at Royal Bank of Scotland (RBS) and Halifax Bank of Scotland (HBOS) respectively, agreed that the City’s bonus culture must change.

Hornby’s suggestion that bonuses be paid over a four- to five-year period rather than the current system of annual payments echoed sentiments expressed by Goldman Sachs chief executive Lloyd Blankfein on Monday.

Bonuses should be assessed over longer periods to avoid “excessive risk-taking”, he said, adding that payments should be made in stock.

By prohibiting the sale of this stock until retirement, the long- term interests of executives and shareholders would be aligned.

In Ireland, too, executives are cutting back. No bonuses will be paid to any of Irish Life & Permanent’s 160 senior managers for 2008.

This is in stark contrast to 2007, when IL&P chief executive Denis Casey and fellow directors Peter Fitzpatrick and Kevin Murphy received about €1.4 million in bonuses.

Popular outrage over executive compensation packages has catalysed this newfound humility.

The image of overpaid bankers is confirmed in a new study, Wages and human capital in the US financial industry, 1909-2006. New York University finance professor Thomas Philippon found financial wages were "excessively high" around 1930 and again between the mid-1990s and 2006.

Depression-era regulations saw a migration of highly-skilled labour from the sector and a rapid loss of the wage premium relative to the rest of the private sector.

By 1980, financial sector wages were similar to wages in the rest of the economy.

A new era of deregulation followed, leading to highly skilled labour “flowing back” into the sector.

By 2007, Wall Street bonuses were more than $200,000 per employee and Philippon concludes that “bankers were paid about 40 per cent too much”.

That is now changing, but not everyone is lining up to give up their outsized bonuses. AIB and Bank of Ireland reportedly told the Government that contractual reasons prevented them from scrapping bonuses for a large number of staff.

It emerged last week that RBS, which is 68 per cent owned by the British government after receiving £20 billion (€22.3 billion) in public money, was planning to distribute up to £1 billion in bonuses.

In the US, AIG has attracted opprobrium due to plans to pay up to $1 billion in “retention bonuses” to staff, despite having received $150 billion in taxpayer loans.

To many, former Merrill Lynch chief executive John Thain epitomises bankers’ inflated sense of entitlement. He famously spent $1.2 million redecorating his office last year, splashing out $87,000 on a rug, $35,000 on a “commode on legs” and $1,400 on a parchment waste can.

Last year, he requested a $10 million bonus even as the firm’s toxic debts continued to balloon. More recently, he authorised $4 billion in bonuses for staff, despite the fact that the company lost $15 billion in the same quarter.

Ironically, Thain became famous after replacing Richard Grasso at the New York Stock Exchange.

Grasso was fired after revelations that he had been given a pay package worth almost $140 million. Thain’s predecessor at Merrill, Stanley O’Neal, received a compensation package worth $161 million after his disastrous subprime bets led to him being shown the door.

Still, Barclays said on Monday it was reviewing its bonus structure, Germany’s Commerzbank is reviewing bonuses pledged to bankers, and Swiss giant UBS cut its 2008 bonus pool by more than 80 per cent and promised to claw back previously paid bonuses in the event of future losses.