Greedy Bank Bosses

Posted in : - Blog -, Britain's Economic Policy, Wages and Salaries on by : petersen Comments: 0

The new Lloyds Bank boss is to get an annual package of £13m, with a £4m ‘golden hello’, (The Guardian 31st  March  2011). In his interview with Charles Moore reported in the Daily Telegraph earlier the same month  (5th March ) , Mervyn King, the Governor of the Bank of England, pointed out  that  manufacturing and service industries all over the country pay far less  than financial services  He said that this was “because bosses in those industries  care deeply about their workforce, about their customers and, above all, are proud of their product. With the banks, its different- there isn’t that sense of longer-term relationships”. Huge  bonuses were announced recently  for Barclays Bank executives  – £6.5m for boss Bob Diamond, £10.6m for the aptly named Rich Ricci. In total, Bob Diamond is in line for £27m pay this year, despite shares falling  and dividends cut – at a time when bank lending to manufacturing has fallen (Polly Toynbee, The Guardian 20th  April 2011). 

Such news items  may make people  wonder how the difference between their  pay and that of a top banker has grown so much .  Conventional  economic theory says that pay is related to productivity,  and to supply and  demand  – broadly speaking,  that people  are paid what they  are worth. This theory  has been disproved time and time again, and yet it is still widely believed  It is generally believed that the top  bankers who got near to  collapsing the  whole  world’s  financial system are worth the enormous pay and bonuses they still award themselves. Bankers  have scared the British Government into refraining  from  limiting  or taxing  their huge  pay and bonuses more  heavily for fear that bankers  would emigrate and deprive Britain of the very valuable services which they are thought to be providing.

Underlying the fear that bankers would emigrate if their pay were to be cut is the theory that  the prices –  the wages, salaries and bonuses paid to different sorts of workers  –  are  determined by supply and demand. The theory says that pay gravitates to the level at which the demand for a particular skill is equal to the supply. The theory also  assumes that people are paid roughly in accordance with what they contribute to a firm’s operations. Economists and the general public still believe that the economic theories of supply and demand and productivity  apply to wages and salaries. In contrast,historical evidence shows that pay is determined mainly by social status and power. People are generally paid partly in accordance with what society as a whole thinks they are worth, and partly by the power they have to grab resources.(1)

Top British bankers claim that if  their  salaries and bonuses were to be reduced or taxed  more heavily, many of them would emigrate to better paid jobs abroad. That is very unlikely. There has never been a  shortage of good senior  bankers in the United States, Japan, and Europe. Why  would banks in those countries  want  to import British bankers who want to leave Britain because they think that they don’t  get enough pay?

Few people seem to realise that the main reason why top bankers are paid huge salaries and bonuses is because they are greedy people who control enormous funds. Their high pay and bonuses bear  little relationship to supply and demand, or  to  their productivity. Bank bosses  allocate large proportions of the funds they control  to themselves, instead of offering enough loans to small businesses which  need the money to run their businesses. Why do other bosses  of very large, profitable enterprises in manufacturing and service industries  pay themselves much less than top  bankers? The answer is breathtakingly simple. Some of them may be quite greedy, but they are nowhere near as greedy as top  bankers. 

Does it  matter to ordinary people if  bank bosses working similar hours make more money in a few days than they  get in a lifetime?   Richard Wilkinson and Kate Pickett  have shown that extreme inequality does matter. Some other countries  which have  more successful  economies than Britain – such as Sweden Norway, Denmark   and Japan –  also have  much more equal incomes than Britain.  A huge range of things are better in those countries than they are in Britain – life expectancy , mental health, drug abuse and violence,   literacy levels, obesity and teenage pregnancy are better in  more equal countries. Countries  with bigger  gaps between rich and poor –in particular the United States – are bad in many ways for nearly everybody  – whether they are  poor, in  the ‘squeezed middle’, or even  very rich.  For example, even though the United States is the richest country in the world, more people suffer from bad healththere than they do in several poorer  countries where incomes are less unequal.

   The balance of evidence is that nearly everybody would benefit if Britain were to become less unequal.

References:

(1)    Guy Routh, Occupation and Pay in Great Britain, 1906-1979, London, Macmillan, 1980, pages 181 -220

(2)     Richard Wilkinson and Kate Pickett, The Spirit Level: Why More Equal Societies Almost Always Do Better, Allen Lane, 2009.

Thanks to Jessica Hodge for some of the thoughts and material in this piece.

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