Sir, – Sometimes a natural experiment can be observed, a set of circumstances that arises without deliberate planning or orchestration and which can elucidate matters that might otherwise be hard to study. The current status of our main banks seems to be an example.
After the financial crash about 15 years ago, Bank of Ireland (BOI) and Allied Irish Banks (AIB) have since returned to profitability. Both make annual profits of the order of a billion euro and have market capitalisations about 10 times that.
Both offer comparable levels of customer services around the country and their shares trade in decent volumes on stock exchanges, paying modest dividends.
The significant difference from which we may learn is that salary caps were removed at BOI during late 2002, following pressure during that year from senior management, while they remain in place at AIB, at €500,000.
We are often give to believe in the wisdom and efficiency of markets. Since the middle of 2002, the share price of AIB has risen from €2.16 to €3.97, an increase of about 83 per cent. Much of that increase occurred early, as from the end of that year the increase is only about 10 per cent. Bank of Ireland since mid-2002 has risen from €6.06 to €8.55, a 41 per cent increase and has dropped a few percentage points since the end of 2002, around when the salary caps were eliminated.
It may be too early to notice the benefits from uncapped bankers’ salaries. It may also be worth considering who such benefits might accrue to – the management themselves, the shareholders or the customers. It can hardly be all of the above.
But for now, is there sense in preserving the difference so as to establish what marginal gains such inflated salaries provide, and to whom? – Yours, etc,
BRIAN O’BRIEN,
Kinsale,
Co Cork.