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Like a general without an army, Michel Barnier is hoping shareholders will join the EU’s top financial services regulator in his battle against the excesses of Anglo-Saxon capitalism.
“Morally indefensible” pay for bankers is in the crosshairs of the French commissioner, who this week told the Financial Times that shareholders in Europe’s listed companies will be given a binding vote on pay.
He plans to give investors in banks even greater voting powers to limit the gap between their lowest- and highest-paid staff and to set a maximum ratio of bonus to salary for bankers’ pay.
While these proposals are unlikely to be fleshed out until Mr Barnier presents details of his governance reform this autumn, they are already meeting a mixed reception from banks and their investors.
Both groups dislike the idea of shareholders becoming involved in the detail of pay policy at banks. Investors may be the owners of the banks but instead of micromanaging pay levels, they prefer to delegate the issue to board members and then vote on their proposals.
Even so, Mr Barnier’s plan to empower shareholders sounds less alarming to banks and their investors than the EU parliament’s earlier proposal to impose a blanket one-to-one bonus to salary ratio on all lenders.
Indeed, the commissioner’s latest proposal may be an attempt to stop EU lawmakers reining in bankers’ bonuses by laying down pay limits in the black letter of the law – something that has alarmed a UK-led bloc of countries.
But some bank investors might ask: is Mr Barnier fighting the wrong enemy? If he really wants to address the problems of the banking sector, is this the best way?
Shareholder revolts over pay at Barclays and Citigroup in recent weeks show there is still work to be done in this area. Yet what investors want is to link pay more closely to performance rather than imposing strict limits on how much bankers earn.
Besides, setting a fixed bonus-to-salary ratio could create more problems than it solves. Banks will respond by raising fixed salaries, reducing their flexibility when profits fall and making pay less linked to performance. This is already happening – the fixed portion of bankers’ pay rose from a third before the crisis to more than half now.
As the recent $2bn-plus trading loss at JPMorgan shows, pay is hardly the most pressing worry in the banking sector. If Jamie Dimon had been paid $2.3m instead of $23m last year would it have reduced the massive risks taken by its chief investment office, which acted like a $360bn in-house hedge fund?
A much more pressing issue is how to regulate banks that are too big to fail so they are prevented from taking excessive risks with taxpayer-guaranteed deposits.
The problem Mr Barnier will face is that shareholders are likely to be reluctant to mount up and ride into battle against the banks on his behalf. As Napoleon said: “Without cavalry, battles are without result.”
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