The right wage for a top banker

 

AIB HAS applied to the Department of Finance for approval to breach the €500,000 salary cap that the Government has set for payment to a new chief executive. The bank’s application has, however, been met with a cool initial response from Minister for Finance, Michael Noonan. AIB, he warned, would need to make “an extremely good case” before the Government would change its mind. For good measure he pointed out the cap on bankers’ pay was 2½ times what the Taoiseach earns. Certainly, Mr Noonan’s scepticism will strike a chord with a public deeply disenchanted with banks and bankers.

To date, some €64 billion of taxpayers’ money has been used in recapitalising the banks. One-third (€21 billion) of that sum has been invested in AIB, where the State now owns 99.8 per cent of the shares of the bank. Clearly, the Government must be concerned to protect the State’s investment, and so ensure the best return for the taxpayer. And how this can be achieved is central to the debate on the Government-imposed pay cap. After the introduction of the State bank guarantee in 2008, the Fianna Fáil-led coalition asked for a review of the pay of bankers in the financial institutions covered by the scheme. The Covered Institution Remuneration Oversight Committee (CIROC) in February 2009, recommended that the annual base salary for the chief executives of AIB and Bank of Ireland should be €690,000. The then government rejected the committee’s recommendation, favouring instead a €500,000 salary ceiling; something AIB was forced to accept but Bank of Ireland, where the State has a minority (15 per cent) stake, has managed to avoid.

AIB’s difficulties remain acute. For almost a year the post of chief executive has not been filled. During this time David Hodgkinson – a part-time chairman – has acted as executive chairman and chief executive. This cannot continue. Mr Hodgkinson has questioned the wisdom of maintaining the cap on executive pay, given the need to attract suitable candidates for such a challenging post. That said, Mr Noonan’s own concerns, and those of the public, are obvious. Banks were saved from collapse at a huge cost that almost bankrupted the State. Bank executives, it seemed, were rewarded for failure via inflated salaries and unmerited bonus payments.

Because taxpayers now effectively own most domestic banks, however, they have a financial stake in their success. AIB urgently needs a skilled chief executive to protect and enhance the bank’s value and to secure the best return for investors. The Government now needs to show flexibility and ingenuity in handling AIB’s request to breach the pay cap. In any agreement, it should insist the chief executive’s remuneration is structured in a way that offers him or her significant financial incentives, which are based on long-term rather than – as in the past – illusory short-term performance criteria. That approach would go some way to aligning the self interest of the chief executive with those of the taxpayer as shareholder, and to their mutual benefit.