BANKERS’ PAY IS STILL TOO MUCH AND WRONG

BANKERS – correction senior bankers – get paid too much. They also get far too much in bonuses. Asking them to wait seven years for some of the loot will still leave them paid too much, only later.

It’s also at the same time both unfair and probably utterly pointless.

Ask yourself: would you like a big part of your wage or salary to be ‘put on hold’ for that long? And then, at the end of that time, whether you got paid all, part or none of it, would be decided on some fuzzy feelgood assessment?

That’s the unfair part; the pointless part is that the ‘assessment’ is equally likely to be just a rubber stamp.

In short and in sum, the whole process won’t encourage and indeed force bankers to behave better. It also won’t really reward them on (even broad touchy-feely) results actually delivered and sustained beyond just a year or two.

So at the end of it all, nothing will really change. They will still be paid too much. They will still get too much as bonuses. And it still won’t really be related to performance, whatever all that means in our new ‘woke’ post-Hayne world.

Now, let me add, just to further confuse you, what APRA is imposing for senior executive pay makes broad sense. That’s to say, it makes sense in terms of the Hayne (Royal Commission) roller-coaster.

The pay deal for new NAB CEO Ross McEwan – coincidentally and conveniently revealed last week – demonstrates my points.

McEwan will be paid a basic $2.5 million. If that was it, it wouldn’t be enough – judged on relativities to other jobs and the responsibilities and very, very tough challenges facing the CEO of a major bank.

But it is not it. He can earn a further $7 million in bonuses, which would take his total up to $9.5 million.

That is in my judgment arguably too much. The $9.5 million is too much and that over 70 per cent of it would come as bonuses is also too much.

This is very especially true as the real bonus figure would end up much, much higher when it was actually paid four or, now, at least in part, seven years later.

We saw that most graphically with Qantas CEO Alan Joyce when he pocketed just under

$25 million in the 2016-17 year.

The biggest component of that $25 million were shares that vested (became his) worth $18.6 million. But when those shares had originally been awarded to him in 2014 (subject to vesting later on performance), they were worth only $4.5 million.

Apply that sort of outcome to the McEwan numbers. He could be paid $9.5 million, but when he actually got the deferred part of that, it could be, say, $20 million.

My point is that $20 million would be too much. And the fact that nearly 90 per cent would be in bonuses is even more too much.

And critically these sorts of absolute numbers and ratios percolate down from the CEO through the executive structure; making them all paid too much and with too much in the form of bonuses.

As I wrote, Joyce fully deserved the $25 million – because of the billions he had delivered to shareholders with his success as CEO. That success turned a relatively modest salary into a supersized one.

I mention Joyce and Qantas because banks and their CEO salaries – and both incentives and rewards for performance – are and even more should be different.

Banks are like public service utilities. They should not be chasing excessive profits; and indeed if a particular bank succeeds in making excessive profits, it will almost certainly be built on sand.

That is the lesson of so many individual ‘supersuccess stories’ over the decades; and indeed of the financial system overall.

That’s what gave us the GFC. Albeit, but not in Australia. Mostly, because our banks were able to grow fat on mortgage lending; they didn’t need to chase financial exotics.

So to return to the APRA proposals and the McEwan numbers.

McEwan should be paid a – slightly – higher base salary of somewhere in the range $3-3.5 million and have much, much lower bonus elements. Crudely, I would suggest a 0-50 per cent short-term bonus (as against 0-150 perc ent). And a long-term bonus of 0-75 per cent (as against 0-130 percent).

That is to say the actual numbers should be smaller and the fixed salary should be a higher proportion.

He should be expected to do his job and do it well and be paid accordingly.He should neither need nor, if you think about it, really be capable of doing ‘better’ than what is or should be his best anyway.

That would both limit the need for trying to work out complex measures of perfomance and success – both financial and nonfinancial – and reduce the risks of paying ‘too much’ in bonuses.

This becomes even more critical in all the other executive salary levels and structures that flow down from the CEO pay and bonuses.

In exact contrast to the Mafia aphorism that the fish rots from the head down, reforming bank executive pay has to start with the CEO. The big thing that apparently ‘everyone’ does not understand is bank CEO pay should be set very differently to every other CEO pay.