Don’t sneer at big bank bonuses

CNBC COMMENT

IT’S confession time. I had a major “senior moment” last week when, not for the first time, I completely misunderstood a piece of eminent academic research. The piece in question was about banker pay.

Brilliant, I thought, here’s a piece of hard research that confirms that bankers are still making and generating vast sums of money for the UK economy, when we are struggling to create alternate national champions in other industries on a global scale.

The report from professors at the London School of Economic (LSE) pointed out that, “despite the financial crisis, the share of total UK income going to bankers has not declined since 2007.” It went on to say that new disclosures from the FSA revealed that, for 1,408 key employees in ten London banks, cash payments in 2010 averaged £568,000 per year. Including expected payments (in cash and equity), their average pay rose to £2m.

I thought: “Wow, this is great. Here we are amid the greatest clampdown ever on the financial sector, and people can still go out and earn vast sums of money if they work hard, are in the right place at the right time, and are clever enough at their job.”

Isn’t that wonderful? Apparently not. This research was actually trying to imply that this is a bad thing, and not to be applauded at all. It seems the report is backing up European Commission efforts to set caps on the ratio of bankers’ bonuses to their salaries. The authors point out that “the best approach is to improve financial regulation to stop banks earning excess profits.”

So let me get this right then. We have a raft of regulation on the table to improve capital ratios at banks – to ensure we never get another crisis in the sector of the magnitude of 2008 ever again. Other regulations are splitting banks’ investment banking and proprietary operations. All this, and a whole host of other measures, is in place. This is all good news, I guess, for the longevity of the UK financial sector, its integrity, and for improving its worth to the broader UK economy.

Correct me if I’m wrong, but the academics aren’t demanding a better banking sector. They are demanding a banking sector that withdraws a level of performance pay deemed excessive by them and the European Commission. Why? If the banks are safe, if they are better capitalised, better regulated, and better run, why do we give a jot about how much the top bankers are paid?

Not jealousy by any chance is it? Not part of this spurious fairness agenda that seems to have a grip on the political and academic establishment these days? Save me please. If it was an industrialist or a fisherman or a scientist making this money, would we demand pay caps? I doubt it.

I’d love Britain to have the biggest and best technological sector in the world. In fact, we have a pretty good one despite its niche status in proportion to the rest of the UK economy. But until it is more than a niche, don’t you think we should savour something we’re actually not that bad at rather than beating it, and all those who participate in it, into the ground?

And finally, those nasty bankers who are being paid an average £2m. Aren’t they paying around half of that in tax to the Treasury? That’ll pay for some more academic research about how bad the City is.

Steve Sedgwick is an anchor on CNBC.