Yesterday the members of the committee hit out at bank chief executives who received huge bonuses regardless of the poor performance of their banks.
Today professional witnesses said that the “culture of machismo” and risk-based incentives had helped propagate the credit crunch and the resulting economic downturn.
Deloitte head of remuneration Carol Arrowsmith said: “I think it’s fair to say that incentives contributed in some part to the problems.”
Jim Cousins MP said: “The machismo was driving the trading floors, encouraging risk.”
Association of British Insurers director of investment affairs Peter Montagnon said: “The culture really is a factor and it can add to the risks if it is not properly managed. It is the job of the institutions to put in place an appropriate culture where reckless risk is not rewarded and there are penalties with failure.”
The witnesses broadly agreed that bonuses helped propagate short-term gain, and the UK financial institutes should be looking to more long-term solutions to risk and reward.
Sir John Cass Business School fellow Peter Hahn said: “A long time ago bonuses were a pretty minimal part of compensation, and it was decided that financial institutions were boring – incentive compensation encouraged risk-taking, which benefited shareholders. So the structure was incentives for shareholders to get more returns and that has driven it for years and years.
“One of the challenges we are dealing with is that a lot of these large rewards did not take into consideration the amount of risk people took to earn those rewards and that is where we have to focus going forward in the banking system.”
The members debated with witnesses over the idea of ‘risk’. Cousins said: “What risk does a trader take personally to warrant these gob-smacking bonuses? The risk of losing your job isn’t unique to the banking sector. Everyone risks losing their job, I don’t think and the general public do not think the risk of losing your job does not warrant a bonus three times your salary. It may be a different job but the rewards are astronomical compared to other hard-working people.
“They were not risking their own money. I don’t understand this claim that traders were taking a risk and then benefiting personally.”
This frustration continued throughout the debate, with members becoming infuriated with those who supported the idea of huge bonuses.
George Mudie MP said: “Why does [Sir Fred Goodwin], on £1.3m a year, need to be incentivised to do their job? Why do these chief executives get
Fox Law Firm founder Ronnie Fox, a City lawyer and supporter of large bonuses, said: “It is unfortunately not a fair world. Some people are well remunerated and they are not necessarily not the people we would choose to be so well remunerated.”
Hahn said: “Big banks have capital advantages, and typically the chief executivess of the big banks got paid more. That was the reality: what was driving the top bankers? Getting bigger.”
The debate found that one of the best ways to deal with the compensation issue in the banking sector is to use the FSA’s power to change capital requirements accordingly: if more condoned bonuses mean more risk, more capital requirement would be necessary.
Trade Union Congress general secretary Brendan Barber said: “A higher capital requirement is certainly a sanction that should be considered. It’s an obvious area to start with.”