By Dalibor Rohac
Monday, March 11, 2013
Last week, the finance ministers of the euro-zone
countries voted to limit bankers’ bonuses. It’s not difficult to understand the
motives here. Investment bankers have had it easy in this crisis: Thanks to
massive bailout programs, not a single European bank has gone bankrupt since
late 2008.
But on the other hand, it seems a bit odd for European
governments to worry about excessive banker pay while spending wildly to keep
banks afloat.
Specifically, the euro-zone group of finance ministers
agreed that shareholders should have to approve a banker’s bonus once it
exceeds the banker’s salary, and that bonuses of more than twice a banker’s
salary should be forbidden altogether. The move has stirred relatively little
controversy — only Britain’s chancellor of the exchequer, George Osborne, has
pledged to fight the measure.
Incidentally, last weekend, the Swiss voted in a
referendum on a detailed proposal guiding the remuneration of corporate
executive and board members, known as the Minder initiative. The measure,
approved by a sizable 68 percent majority, bans certain forms of compensation,
including so-called golden parachutes and bonuses tied to mergers and
acquisitions, and ties other remuneration to stringent approval requirements by
shareholders.
While it is easy to understand the sentiments behind
them, the current initiatives are misguided. The European Commission claims
that “excessive bonuses [at banks] led to excessive risk and taxpayers having
to step in,” but the reality is quite different. Rather, overpaid CEOs and
their bonuses have been a symptom of the implicit guarantees extended to the
financial industry by policymakers, which also happen to encourage excessive
risk.
And further, the Minder initiative can hardly be a
well-targeted response to risky bank behavior and the cost of bailouts: It
imposes a one-size-fits-all model of corporate governance on all companies,
whether or not they operate in financial services, and whether or not they have
received public money.
Notwithstanding the widely publicized cases of seeming
excess — such as the $76 million worth of shares given to the CEO of Credit
Suisse in 2010, just months before the company cut 2,000 jobs in response to a
weak global recovery — shareholders already have effective mechanisms to
discipline companies’ executives. True, there are situations when shareholders
fall prey to fraudulent or predatory behavior. But can a uniform regulation of
executive pay prevent those?
Consider Enron. The massive fraud by its executives, with
the help of auditing firm Arthur Andersen, occurred under the full oversight of
regulators. Non-transparent accounting rules that assigned a huge role to
auditing firms created a false sense of security among investors. Similarly,
attempts to regulate executive pay could be seen as relieving shareholders of
one of their key responsibilities. It will hardly incentivize them to be more
vigilant.
The fall of Enron was actually an instance of the market
doing its job. The company and its culpable auditor, Arthur Andersen, are out
of business. In sharp contrast, the now-common notion of “too big to fail”
effectively eliminates bankruptcy as a disciplining device of the market. When
it comes to corporate plutocracy or cronyism, especially in the financial
sector, executive pay is a very minor part of the problem. Much more scandalous
is the extent to which our financial institutions are shielded from losses
through the use of public money.
Reasonable people may disagree about whether Europeans
and Americans should let big financial institutions fail. But whatever one’s
take on that question, the debate over executive pay is just an adolescent
distraction from the hard choices policymakers need to make.
No comments:
Post a Comment