Perhaps the most surprising thing about the shareholder revolts on pay is that they took so long to come. After all, it is years since the financial experiences of bank executives (comfortable, let us say) and bank shareholders (dreadful) decisively parted company. By failing to handle a business problem at the proper time, the boards of banks have managed to turn it into a wider social issue that is resonating well beyond the banking industry.
It is easy to forget, in the general atmosphere of moral indignation, what a serious economic issue bank pay had become. The industry’s contention, that it concerned nothing more than the distribution of profits fairly earned in an open, competitive market, was always questionable. It was the search for higher remuneration pools that led banks to expand their balance sheets, running risks with results from which we have all suffered.
Like football teams, banks strive to finish in the top four. Failure to do so puts at risk their ability to pay high wages, which in turn imperils their future chances of finishing in the top four. Like football teams again, their business models have been undermined, not by paying the odd star very highly, but by systematically and catastrophically overpaying the not-quite stars. In a witty and perceptive speech, Andrew Haldane of the Bank of England has compared the striving of banks for size to elephant seals, which have evolved to maximise their own success at the expense of the species. Many people outside the industry suppose that top bankers are merely concerned with their own pay. That is not so: they are keener still that their institution pay all key staff at the “appropriate” level. Truly the tail has been wagging the brontosaurus.
From the beginning of the crisis, two things have been evident. First, banks desperately needed reform. Second, they were incapable, because of what might be called first-mover disadvantage, of reforming themselves. It follows that they have had to be reformed from the outside. Reforms invented by outsiders were always going to be more painful.
The pursuit of risk in pursuit of pay has turned this into an issue for governments, their economies devastated by the financial crisis and their exchequers crippled by implicit taxpayer guarantees for banks. So we have seen higher capital requirements to make the banks safer and proposals from, among others, the Vickers commission (of which I was a member) to restructure the industry so as to eliminate the taxpayer guarantee.
The response of many banks to these overdue initiatives is to complain that they can no longer make decent profits, and will therefore (pout) not be able to lend. That is clearly an issue for shareholders, who seem at last to realise that the banks can indeed not make profits under the new rules if they persist in paying the sort of remuneration that was already way too high under the old, lax rules. Something has to give in the cost structure, and that something is pay.
The recent shareholder meetings resemble a dialogue of the deaf. The banks point out that they have already made fundamental changes and that pay for many has fallen in a relatively poor year. But this is to miss the point, which is that pay levels are in absolute terms too high by something like a factor of three. Only some mix of shareholder pressure and public outrage can correct this and the process now seems to be, agonisingly, under way.
Managers in other companies tend to blame the financial industry for the unwelcome attention that all remuneration schemes are now receiving. These people rarely reflect that executive pay has been inflated all round by the excesses of the banks. But for most industrial companies, pay structures still largely follow the hierarchical pyramid; high earners are few; the economic issue is marginal. That will not prevent squawks and some high-profile embarrassment, but this is not an existential question.
In the case of the big banks, why did it take the shareholders so long? One answer is that holding periods are now so short that feelings of ownership are utterly decayed. Another is that shareholders find it hard to co-operate, thanks in part to their obsession with relative, not absolute, returns. Thus a fund that is underweight in a big bank (though still a shareholder) might even prefer the bank’s share price to decline and will not have the same incentive to intervene as an overweight holder. A third, even less charitable answer is that institutional fund managers, who are paid in much the same way as people in the banking industry, feel that high bonuses are part of the natural order of things. Brontosaurus does not bite brontosaurus – until there are no leaves left for lunch.
The writer is chairman of Syngenta and former chief executive of Barclays