Ever had that slightly weird sensation of reading a newspaper headline and thinking, Oh, that’s good news? And then you read the story itself and realise it’s actually supposed to be a bad thing.
I had that experience last Friday while reading the business supplement in The Irish Times. The headline was: "Bonus ban has limited ability to make senior hires - BoI chief". It summarised an interview by Joe Brennan with the chief executive of Bank of Ireland, Francesca McDonagh.
I thought the headline meant the Government’s ceiling of €500,000 a year on salaries for executives in the banks we bailed out, and the ban on bonuses, has done its job of limiting the kind of greed and risk-taking that had such catastrophic consequences.
But no: McDonagh was complaining that the limits are making it more difficult to recruit managers willing "to take a leap of faith". With Minister for Finance Paschal Donohoe about to appoint consultants to review salaries and bonuses at the bailed-out banks, she used a nice euphemism: "We would encourage normalisation of the sector." Which raises the obvious question: what do bankers think of as constituting normality? I suspect they see the era before the great crash of 2008 as normal and the decade of restraint since then as the anomaly.
How does it benefit us, the ultimate owners, if our banks get bigger and bigger, take more risks, cut jobs and squeeze services? It doesn't
The fundamental thing to keep in mind here is that all bankers in Ireland are effectively public employees. We didn’t know this before 2008, but we learned it the hard way. We found out that the Irish banks, however egregious their behaviour, operate with an implicit guarantee that limitless public funds will be made available to them whenever they screw up so badly as to endanger their own existence. They are public institutions masquerading as private businesses.
So what does the Irish public need from the people who run these institutions? Not at all the same things that bankers want for themselves. Those who run banks want them to get bigger and bigger, to make more and more profit, to cut costs by making employees redundant and squeezing services for ordinary account holders. And this is the kind of thing that superstar businesspeople need to be hired to do. They have to be lured by having golden carrots dangled in front of their noses. They have to be incentivised in a world where €500,000 a year is peanuts.
But where is the public interest in any of this? How does it benefit us, the ultimate owners, if our banks get bigger and bigger, if they take more risks to make more short-term profits, if they cut jobs and squeeze services? It doesn’t. We just need banks that don’t lose our deposits, that lend conservatively to individuals and businesses that can pay the money back and that manage not to destroy the economy. For this we don’t need superstar financial entrepreneurs. We need boring, competent, risk-averse managers, people whose names we shouldn’t even have any reason to know. People, in other words, who are only too happy to get out of bed for less than half a million a year.
If there is any relationship between competence and high salaries in financial institutions, it is an inverse one
One thing we should have learned from the trauma of the banking crisis for which we are still paying dearly is that, if there is any relationship between competence and high salaries in financial institutions, it is an inverse one. In 2007 McDonagh' predecessor Brian Goggin was paid €4 million, half of it as a bonus for his brilliant performance. The bank crashed. In 2007 David Drumm of Anglo Irish Bank was paid €3.3 million, €2 million as a bonus for his magnificent stewardship. Michael Fingleton of Irish Nationwide was paid €2.3 million, €1.4 million as a bonus. Bank of Ireland increased the pay of its chief executive threefold in the five years after 2002. AIB and Anglo more than doubled the pay of their CEOs. Which banks were better for shareholders, for customers, for staff and, above all, for taxpayers: those of 2002 or those of 2007?
And if we really do want our banks to be run by driven, competitive people (which I don't), let's remember what those bankers said when they were questioned about the causes of the crash. They all denied any relationship at all between the way they worked and the outrageous sums they were paid. As the Nyberg report put it, "it was claimed by a number of bankers that management and staff were not motivated by compensation alone. Most would compete, it was claimed, as they had during the previous period of lower compensation, on the basis of natural competitiveness and professional pride." We have it from their own lips: they can be just as competitive and professional on €500,000 as on €4 million.
We’ll be hearing a lot more on this over the next year. We will be told we must lift the cap on salaries and bring back bonuses to attract the “best people”. We should reply that we’ve had the best people and we’d rather have just good ones. We will be told that huge salaries and bonuses will show the banks are getting back to normal. We should reply that this is exactly what we’re afraid of.