Bankers fail to pay the price
GIVEN THE perverse role of pay and bonus packages in incentivising the excessive risk- taking and inadequate risk management by senior bank and building society managers which contributed so significantly to bringing Ireland’s financial system to the verge of collapse in September 2008, one might have assumed that those involved would have learned some lessons.
Extraordinarily, however, a Central Bank review of the remuneration of senior executives in those financial institutions suggests otherwise. Extraordinary because these are the institutions whose survival was secured only when the State guaranteed their liabilities of some €440 billion and, later, invested more than €50 billion to finance their recapitalisation. And extraordinary because they have inflicted a cost on the taxpayer that resulted in a sovereign debt crisis, intervention by the European Union and the International Monetary Fund, and provision of an €85 billion financial rescue package for the State.
In an examination of executive pay, the Central Bank sought to establish the pay policies of the banks at the height of the boom and how these had changed with a downturn which also saw the virtual wiping out of the wealth of the banks’ own shareholders. The results of its investigation are deeply disappointing – to put it at its mildest.
With one exception, the review found that “inadequate progress” had been made. And while there was evidence of a tightening of severance pay, with stricter conditions imposed on those availing of so-called “golden parachutes”, it emerged that some key executives in a number of banks had received signing on and retention bonuses during the review period.
In addition, the report found little indication that banks were moving towards a fuller disclosure of their pay policies, as required by European Union rules on bankers’ pay which come into effect next month. In most banks, it said, the procedures used to decide senior executive pay were “not clear, well documented or internally transparent”.
The Central Bank has warned that unless pay practices are changed and given a more definite form then “banks risk repeating past errors”. To ensure that does not happen, it wants non-executive members of bank boards to scrutinise the pay of senior executives more closely and to ensure that key personnel are paid in line with a bank’s “willingness and capacity to take risk”.
Much of Irish banking is either already in State ownership or increasingly under its control. And the Government has also appointed public interest directors to bank boards with the object of improving their corporate governance. In that context, it is remarkable – to put it mildly again – that the State, having invested so many billions to ensure the survival of the banking system at such detrimental cost to the taxpayer and to society at large, should not exercise more influence over how the banks operate a key aspect of their business – that of setting the pay of senior bankers in a clear and transparent manner.