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.