Banker pay linked to asset returns?

Updated: 
Bank chief exec pay has soared from £1.5m in 1989 to £16m in 2011. A staggering rise. Yet if those numbers were related to the returns made on bank assets, that £16m figure would have just climbed to £2.1m. This calculation has been developed by Bank of England official Andrew Haldane. But would things really change? Especially when most banks can manipulate accounting information easily.


Fairer?

The usual return on equity targets used by many banks have distorted bank pay, says Haldane. "It would be a relatively small step for banks to switch from ROE [return on equity] to ROA [return on assets] targets in their capital planning and compensation," he said at a recent conference.

And while bank pay has been largely kept off-limits to the public, the risk has now been absorbed by them. Add to that, of course, the considerable reduction in corporation tax over this time, the rise of offshore banking, plus the rise in commodity speculation.

So, what is this change? Different figures on the balance sheet, essentially. Equity is the share capital of the company, so the accounting value of the number of shares the company has issued, including retained profits.

Play the game

"The total assets includes value of all assets purchased by the company, partly funded by debt," says Alan Brett, head of research at corporate governance agency Manifest. "But some companies are quite highly geared, - for example Barclays total assets are worth 24 times its total equity – this ratio has fallen for UK banks in recent years as banks are pressured by regulators to increase their equity capital."

"Return on assets is also favoured by some investors over return on equity as a there is less of an incentive for banks to engage in risky behaviour, i.e. taking on excessive levels of debt funding of the sort that has required bailouts in recent years."

So though Bob Diamond's pay package is enormous, it's part-based on the return on assets. Part-based, mind; the calculations still remain highly obscure to outsiders, and so difficult to calculate.

Accounting information can be easily manipulated, so don't, er, bank on change. However you twist it, one remuneration expert thinks pay packages will still be high, whatever model. "It's a game. Pressure gets put on the remuneration committee to come up with a figure. The outcome won't be that different."

Or tackle it with legislation. Will the outcome of Vince Cable's current review make a difference?

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