This is true of course

And equally irrelevant.

The near ten-fold rise in bank chief executives\’ pay from an average of $2.4m (£1.5m) in 1989 to $26m by 2007 could have been restrained to $3.4m if pay had been linked to the return made on assets said Andrew Haldane, executive director of the Bank.

Mr Haldane said the return on equity targets employed by most banks had warped the industry\’s compensation structure and led to a situation where the average pay of top executives had risen to 500 times the median US household income.

\”It would be a relatively small step for banks to switch from ROE [return on equity] to ROA [return on assets] targets in their capital planning and compensation. Yet the effects on risk-taking and remuneration could be large,\” said Mr Haldane, speaking at the Wincott Annual Memorial Lecture in London on Monday.

For of course the shareholders\’ interest is in return on equity, not return on assets. And given that the managers are there as the employees of the shareholders in order to maximise the shareholders\’ interests then return on equity is the right measure for how well the managers are doing.

11 comments on “This is true of course

  1. Yes, Andrew Haldane, stop being beastly to this massively subsidised industry protected by incredibly high barriers to entry! The shareholders know what their doing.

  2. And reducing executive pay will affect the high barriers to entry into the banking industry? I’m amazed.

    Anyway, the current leftist trope is that we need more regulation, doesn’t matter whether it is effective or even good, just more of it. Which will, of course, raise the barriers to entry even higher.

    Note for Arnald and other trolls: I am certainly of the opinion that there should be entry barriers to banking – and I agree that these are too high, especially for small and community financial organisations such as Credit Unions. However, ‘fit and proper person’ (which doesn’t mean ‘cuddly, nice and votes Labour’) and financial stability checks are essential. And RBS should have been allowed to go bust.

  3. @Surreptitious Evil

    No, not relevant, I just find it funy righties tend to defend only one type of state backed industry – finance.

    It is a little relevant, as because barreirs to entry are high the subsidy is not competed away and rich bankers are able to capture some of it. Which is bad.

    @Serf

    Goodhart’s Law is unavoidable, agree.

  4. I just find it funy righties tend to defend only one type of state backed industry – finance.

    You may be correct about “righties” however there are few people around here who think that the bailing out of the banks was the correct thing to do. As I said before – they should have been allowed to go under, the deposit guarantees put in place and then the govt could have worked to ensure that customers were able to continue banking (eg by supporting, via guarantees, the rump bank either until a buyer was found or until the customers had transfered away.) The mass injection of capital was bad – it distorted the market and set up the much discussed increase in moral hazard.

    You’ll find more here who think that inappropriate government interference in private contracts (i.e. Fred the Shred’s pension rights) was inappropriate.

  5. Sorry, that should have read “the deposit guarantees already in place activated, in so far as they were needed”.

  6. Does anyone really believe that rocketing executive pay is reflective of a shortage of people capable of doing the job? That there are now ten times fewer people capable of and willing to run a bank than before? If there was a market in operation here, rather than a lot of corporate back-scratching and averting of eyes, the high salaries would have attracted more people in from other industries and more people from within the industry to go for the top jobs, putting downward pressure on this remuneration. So it looks to me like the notoriously closed and incestuous world of banking is even more closed and incestuous, particularly at the top levels.

    Sure, overcompensation is the shareholders’ lookout, but we all know most of them aren’t really looking out.

  7. …..Does anyone really believe that rocketing executive pay is reflective of a shortage of people capable of doing the job?…..

    That is the real problem, though I am damned if I have any idea how to correct it.

    There are many examples of Chief Executives whose decisions are completely incoherent, to the extent that replacing them with a person chosen at random from the street would be an improvement.

    How can there be a shortage of talent?

  8. High pay doesn’t need an absolute shortage of talent, just a huge advantage in having better talent.

    Timmy’s mentioned this in sports. Yes there are lots of people who can run quickly, but if being able to run a hundreth of a second quicker will win the race, then that tiny advantage is worth a fortune.

    Whether banking executives demonstrate higher talent, how much a small amount of greater talent is worth in banking, and whether that marginal premium has increased since 1989 I have no idea.

    But that’s the question to ask. JamesV’s comment about good bankers being 10 times more scarce than before is irrelevant if what matters is the premium due to greater talent.

  9. A lot of very highly paid banking executives didn’t seem to run their banks very well in the years to 2008.

  10. The one thing you *should* be able to say about a person’s salary is that it is less than they are worth to the company.

    It’s always possible that a bank’s CEO was earning $2.4m while providing value of $40m and that this rebalancing is reasonable.

    I admit it seems unlikely in this case.

    The other part of this is determining an employee’s value is often virtually impossible. So as a proxy, if you work out what the average employee is worth, then pay those at the bottom less and those higher up more then it’s all good. Once you’ve done that, if the company is still making billions then you can divert a chunk of it to the guys at the peak without breaking anything. If you tried it with some guy in the middle, the whole pyramid has to be re-calculated.

    Again, I’m not saying this is a good thing.

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