G20 - Part VIII: a cap on compensation?
By Denis on Tuesday 15 September 2009, 23:20 - Permalink
In spite of the outrage, limiting compensation for bankers will be hard. The question is: on which ground do you select the population having compensation cap vs. the population not having them? This is not just a pedantic question.
Why was it OK not to cap Bill Gates' salary? He was not a banker, but Microsoft has been repeatedly accused of anti-competitive behaviours... which one could easily associate with simple greed. Why is it OK not to cap salaries for Google founders, when anti-trust questions (related to e.g. scanned books) or political questions (censored version in China) now also appear in relation to the company of which the motto was "do no evil"?
Conversely, why would it OK to limit the salary of an entrepreneur who risks all his possessions (and not more) in his business? What if this entrepreneur has a business in financial services?
If better risk managers are needed, should compensation also be limited for risk controllers, only because they work in banking institutions?
Last but not least, in the current debate: a large category of traders do hedge... risks. Their job is associated to: 1/ pricing the risk for the bank when a client wishes to make a bet and the bank is ready to offer a product matching such a bet, and 2/ trading what's necessary to cancel (or at least minimize) the risk for the bank. A large category of traders are risk managers (and called so, and this is not a joke). Do you limit the compensation of the people managing the risks, or should you actually limit the payoff to the client (who is the one really taking the bet naked)?
Not all traders are risk managers: at the institution level, proprietary traders usually are not risk managers, instead they cherry-pick risks. Buy-side traders usually are not. Brokers sort-of are (they stay in risk only for short periods of time)... But, at the systemic levels? It is known that a reason behind the recent crisis has been a liquidity crunch, the fact that some products no longer were traded, they had no price (and no value as asset from an accounting perspective, although they still had a value as a liability... creating a downward spiral of the valuations between institutions). All traders increase the liquidity of the market, they contribute to the observability of asset prices (hence to accounting transparency), they contribute to smooth transfer of risks (typically, a client with a long-term investment but a need for cash in the short term can swap investment for cash, or can get off his investment on the secondary market instead of being stuck with it until maturity)... To be provocative, traders were as much a solution as a problem in the last crisis. How do you select the population with a cap? Because make no mistake: the traders helping the situation did not do it for free.
I personally don't think a particular human being may be worth millions times more than another human being. Any other human being... but this is the state of our world, between the poor and super-rich. So I'm not shocked by a cap on compensations. But it is impracticable/illegitimate/unrealistic/unfair to limit the cap to bankers alone.
Comments
FT's columnist Michael Skapinker's
Time to turn
the page on top pay addressed that, on pay, the same stories and outrage
keep coming, but nothing ever changes...
At the same moment, Le Monde published
Les Britanniques choqués par ces patrons qui engraissent comme
des matous
Krishna Guha's article,
Fed clampdown on US bank
pay rules, reports on attempts to flexibly yet efficiently limit
compensations. Flexibility is a must and it is reassuring to see it being taken
into account by the Fed. Unfortunately, the rhetoric about looking at
profitability in a risk-adjusted way still goes on... but risk measures have
not been improved the least in the meantime.
Has everyone forgotten that the risk of a serious crisis was virtually seen as null, right at the start of 2007? We don't know how to measure risk. Risk-adjusted compensation is likely to push exactly toward what happened on credit securitisation: the business will be pushed into areas where risk is under-evaluated... It won't make the system safer, quite the opposite: everybody will happily pile risk up, without measuring the extent of it, and everybody will likely take similar positions, creating systemic risk for the day when risk awareness will develop. And naturally that day will come, but maybe after years of illusory "growth" and history will repeat itself. Until we learn the lesson: we don't know how to measure risk. Risk-adjusted anything (compensation, capital...) is a chimera. We blew up because our capital requirements were risk-adjusted: risk in 2007 was under-estimated so capital was not enough to absorb the asset revaluation when it came. Supposedly, politicians are working on avoiding pro-cyclical rules... Risk-adjusted compensation is the proof they don't (or don't understand pro-cyclicality yet, that cycles apply to more than just capital needs).
On google turning "corporate" (and beyond the recent polemic on the book deal, with the Department of Justice
here or France
here), one may want to
read on Google's
network neutrality
vs. common carriage position.