FINANCIAL REGULATOR Matthew Elderfield has made a business case for re-examining pay structures in the Irish banking system. According to his analysis, taxpayers – by virtue of their effective ownership of most domestic banks – have a vested interest in seeing these institutions reinvigorated by managers who can deliver the best return on billions of euro invested by the State during recapitalisation. That, he suggests, may require some reassessment by Government of its restrictions on executive pay if banks are to attract those with talent and ability, whether at senior management or board level.
Apart from identifying EU standards as a “good starting place”, it was perhaps understandable that Mr Elderfield, given his position, offered no public view on how much he would envisage the €500,000 Government-imposed salary cap being increased by. But his comments were echoed by Allied Irish Banks executive chairman David Hodgkinson a day later when he warned that without greater flexibility on pay, AIB would not get a full selection of international candidates from which to fill the position of chief executive, a vacancy unfilled for nine months.
There is no hiding the irony, however, that Mr Hodgkinson’s contribution came at an extraordinary general meeting of AIB called to approve a further State injection in the bank of more than €12 billion.
In better financial times with banks in private rather than State ownership, the Government would not be involved directly in setting top bankers’ pay. Unfortunately, we live in extraordinary times and the Government is correct, for now, to insist on a salary limit – not least in solidarity with taxpayers who have been obliged to meet the huge cost of bank rescues.
One of the worst features of the banking collapse was the pay and bonuses that some top bank employees enjoyed. Too many were encouraged to engage in reckless property lending and were handsomely rewarded for taking excessive risks at little financial cost to themselves. In this regard, the Committee of European Banking Supervisors – drawn from EU member states – has proposed tighter control of bankers’ bonuses, involving the deferral of incentive payments for some years and including a clawback provision, to allow for the recovery of bonuses secured on the basis of “illusory performance”. At a minimum, banks should put in place such reforms before they press the Government to lift the cap on bankers’ pay.