Can Higher Capital Standards Cause Lower Pay?

Robert Peston is skeptical that the Brown/Sarkozy/Merkel plan to restrict bankers’ pay is either workable or a good idea.

It’s pretty difficult to put a lid on pay in the wider financial industry, especially a globalised one.

Remuneration in finance is like a blancmange. If government and regulators squeeze one part, it will bubble up somewhere else.

If big banks are restricted in the cash rewards they can pay their top staff, they will reward them in other ways - with increased pension contributions perhaps, or cheap loans. Or they’ll pay a fortune to the best ones by hiring them on rolling short term contracts, to keep them off the official books.

He’s basically right — which is why the Europeans might be interested in the Geithner plan (warning: 14-page PDF) to impose higher capital standards on systemically-important banks.

The insight here, I think, is that the biggest banks — Goldman Sachs (GS), Morgan Stanley (MS), Merrill Lynch, etc — are the price-setters when it comes to banker remuneration. If they are socked with higher capital ratios, then their profitability will fall, their bankers will be paid less, and prevailing remuneration expectations in the industry as a whole will decline accordingly. Which would be a most welcome development.

Comments

[Leftfield:]

Unfortunately, the lawmakers are no slouches at sneaky methods of payment. The legal ones include all kinds of benefits that can easily outweigh published salaries, and thus, escape publicized government statistics, MSM and the public.
So, rent-seekers are united at personal gain. That means, even the bankers directly swilling directly from the public trough are benefiting from the personal experience of their paid-for legislators when it comes from drafting laws with loopholes.
Restricting ridiculous pay packages is possible. But, with the legislators we have now, the possible is out of reach.

Sep 04 12:01 PM

[Buckoux:]

On Sep 04 12:01 PM Leftfield wrote:
> So, rent-seekers are united at personal gain.

Yes. And with the emergence of the GSO-type of public employee pension funds, such as the California Public Employees Retirement System (CALPERS), their "rent-seeking" is enslaving -by bond issues- and impoverishing, by budget deficits, to the taxpayer. Grinding greed is no longer limited to just "bankers".

Sep 04 12:25 PM

[Mark Bern:]

Go ahead and impose higher capital requirements. What good will it do, really? GS will reorganize as something other than a bank holding company. The fine print will only restrict those of a certain organizational structure.

Besides, there are so many ways to remunerate executives without calling it compensation that they'll just skirt around it all. Remember who is consulting legislators on how to word the laws! Gs has at least one seat at that table. You can bet on it!

But, maybe it is a step in the right direction, if it enforced consistently. See, now that's where I have problems. If the laws that were on the books had been enforced stringently in the first place I don't things would have gotten so far out of hand.

Sep 04 12:47 PM

[Milkweed:]

O.K. so let me get this straight bankers are paying themselves too much money that should presumably be going to shareholders. So the brilliant plan is to make banks less profitable to reduce bankers salaries? I'm sure shareholders will appreciate the help.

Sep 04 01:04 PM

[bcncv:]

I find the concept intriguing, but not for the reasons you specify. Actually, I don't think restraining the growth of top banks will have a serious impact on compensation across the board.

However, it might be still be a good idea (in principle) to prevent "to big to fail" to be a competitive advantage when it comes to cost of borrowing.

Sep 04 03:29 PM

[whisperonth...:]

When the banks become less profitable, the investors will find some other investment opportunity.

Sep 05 08:56 AM

[Sean Ryan:]

I think its far too simplistic to say that higher capital reqs translate into lower comp levels.

First, its important to remember that the catch-all term "bankers" refers to people with a very broad range of jobs, the only common denominators of which are that a) they are in the financial services sector and b) tend to have relatively high compensation levels.

But if we assume that the labor market is reasonably efficient - and Wall Street's is arguably among the most efficient since productivity can be quantified fairly readily - then comp will remain a function of each individual's profit generation.

Higher cap reqs might then reduce the leverage available to, say, prop desks, and thus reduce the comp of traders on those desks. But plenty of other functions - M&A advisory comes to mind - employ little or no leverage and so would be unaffected.

Moreover, the belief that the remnants of the bulge bracket are price setters in the labor market requires the assumption that rainmakers can't generate comparable earnings at smaller platforms, which is true for a subset of functions but at the firm-wide level seems a dubious assumption.

An investment banker may monetize his rolodex at a Lazard as well as he might at a Merrill, and likewise a trader may trade a hedge fund's capital as profitably as a bank's capital.

Sep 05 09:23 AM