THE GOVERNMENT’S decision to provide €7 billion to recapitalise the State’s two main banks has come with conditions, notably in relation to the pay of senior executives at AIB and Bank of Ireland. These include an agreement that the banks will not pay performance bonuses to some senior executives who will not receive pay rises for 2008 or 2009. This amounts to a one-third cut in the total remuneration of the senior bankers affected. And because the bonus element represents a large part of their overall package, the one-third cut may mean the salaries of these executives remain unaffected.
The Minister for Finance acknowledged that reality, insisting that he wanted a “definite cap” placed on the total pay of senior bankers. He has also informed the committee that is reviewing remuneration in the banks of his wishes in this regard. Mr Lenihan has made clear that he favours an “Obama-type cap” on executive pay.President Obama’s plan is to limit the remuneration of employees of those US financial institutions that have received public, or taxpayers’, support to $500,000 (€391,690). Mr Obama, as president, earns $100,000 less. On that pay benchmark, Irish bankers have some further income adjustments to make. Last week, Bank of Ireland’s chief executive, Brian Goggin, revealed that after his voluntary pay cut, he would receive “less than €2 million” this year. In Britain, where banks such as Lloyds Banking Group and Royal Bank of Scotland have already received £17 billion (€19 billion) and £20 billion (€22.3 billion) respectively from taxpayers, their plan to pay staff bonuses has generated huge political and public controversy. The British prime minister, Gordon Brown, has asked the banks to reconsider their intentions, and has set up a government review of bank bonuses that will report later this year.
The reality in Ireland, as in Britain and the US, is that the taxpayers’ willingness to underwrite the banks was never intended as a means of ensuring that bonuses could be paid to bankers whose reckless behaviour has contributed to the greatest crisis that the world economy has faced since the 1930s. Banks that have been saved from bankruptcy by the intervention of the State and by the generosity of the taxpayer should not be rewarded for failure. Now the Government has sought to ensure that this does not happen here, by using its negotiating leverage with the banks on recapitalisation. That has provided a temporary solution.
The Government is now relying on the committee reviewing remuneration in the banks to produce a new pay framework for senior managers. Taxpayers are the new paymasters.
The challenge for the banks is to change a culture where the emphasis has been on short-term profit and high-risk returns that have generated huge bonuses for senior bankers. That has ended in financial disaster for the banks’ shareholders and for taxpayers. In future, risk will have to be better managed, and reward structured much differently, with bankers’ bonuses paid over longer time periods, and for exceptional performance rather than taking excessive risk.