Sacrificing Token Bankers

The de-knighting of Fred Goodwin yesterday could have been predicted after the unedifying politics of recent weeks. The main political parties, who spent the last decade lauding the financial sector, are competing to disown and destroy public figures who have been cast as the villains of the bank crisis.  Stephen Hester got it last week for his pay package to clear up the mess created by Fred Goodwin who was savaged this week. The politicians are urged on by the popular press and by the public anger about the damage that has been wrought on the economy. The double standards displayed by our politicians are perhaps no more than we should expect from men who have long ago lost any shred of integrity.

However, instead of legislating or taxing to create a society in which supercharged bonuses and pay levels are scaled back to some capped multiple of the minimum wage or average salaries, they have decided to assuage the public mood by sacrificing the easy targets, our celebrity financial villains. Fred had become so intoxicated with the poker game of high finance that he felt he could walk on water. His board obviously believed him and was happy to surf along in his wake. Stephen Hester took a salary and bonus package that was the going rate for managing a global bank and sorting out the failing RBS was the biggest challenge of all. They operate in a remuneration bubble that the financial community had inflated to bursting point. Prudent Gordon became gullible Gordon by going along with it, as indeed did all the other political parties. Banking was the soaring economic growth sector that they thought would create a new global empire with London as its epicentre. Whilst it is hard to be sympathetic to Fred in particular, making him a victim does not create a fairer society nor establish a new culture of trust in either the financial sector or our politicians.

We have been told for many years that our top bankers or executives would go elsewhere unless the rewards for managing private companies and organisations are maintained. The remuneration of senior executives in banks and the corporate sector is far from being the inevitable result of market pressures as we are frequently told to believe. It is effectively fixed by executives themselves through the remuneration committees that they appoint. The committee will be advised by generously paid consultants who provide the advice that the chief executives and senior executives desire - this will include salaries, bonuses and pensions. 

As for an exodus of senior executives, the early indications are that this is not happening. Pay scales in the rest of Europe have never entered the fantasy financial land that is London and they are not going to in the current economic climate. The most successful economies like Japan, Germany and the Scandinavian countries have far more moderate ratios of chief executive to average pay than the UK. They are more in line with the way the public sector operates in the UK where the ratio of Chief Executive to lowest-paid workers is usually in the range 10 to 20. It is also unlikely that companies or senior executives would leave London where they have a network of support services from PR to legal advice and accountancy. And would they really decamp their families from their homes and schools and the culture, sport and social networks that are so vital for spending their wealth and showcasing their ostentatious lifestyle?

The government could resolve these issues by setting guidelines for pay including pensions and bonuses. They could introduce a tax regime that enforced these. But the present Chancellor and Lord Mandelson for the previous government have long argued against this, after all, shredding Fred is far easier to implement. The last Labour Government seemed determined to keep the big earners onside and Gordon Brown surrendered his social justice credentials at the altar of the financial sector. Alistair Darling was much-maligned but did tackle the issue by challenging and taxing the financial sector. The question now is whether the bullying tendency of the present government will get away with sacrificing Fred or will they carry out a more principled examination of how we reward the corporate sector to create a fairer distribution of wealth? I think I can guess the answer - Cameron and Osborne are part of the entitled financial elite, but the hard-working electorate is not.