Bankers Salaries: Market Failure?

By and large, as I wrote earlier this week, I think that it isn't any of the government's business what private companies do about their remuneration arrangements so long as they comply with basic employment and contract law. Yes in an ideal world shareholders would take a firmer line with executives and demand more responsibility from them, but this is extraordinarily hard to achieve.

The case of Stephen Hester is different however in that RBS is largely owned by the taxpayer. It is of course true that we want our money back and need a decent management in place to get the bank on the right course. But I doubt really whether what Hester is being asked to do is so very complicated. Banks are not like Tescos, they are not operating in a world of cut throat competition more's the pity. It was only the spectacular incompetence and monumental folly of the Fred Goodwin regime that created the mess that Hester is now being asked to clear up. He does not need to be a thrusting entrepreneur of Terry Leahy or Phillip Green proportions to achieve this. He just needs to be sensible and conservative and manage the bank competently. Quite why this needs such a high salary is a mystery.

Ah yes, we are told, but the market for the likes of Hester is very competitive and so we have to pay the going rate. But is it? This is very difficult to test which is why execs keep getting away with their mega salaries.

But they do rather undo this argument with the next one. They tell us, after arguing that Hester is only getting the going rate, that at the same time he is forgoing part of it. Hence this bonus is only 60% of what he is entitled to and his salary is fairly middling by industry standards.

It follows logically then that other banks around the world should be looking enviously at Stephen Hester, looking at his rather cheap salary requirements and should be offering to pay him more if he will go and work for them. Are they? Is his phone ringing off the hook? If he had been denied this bonus would he really head off to greener pastures or are they a figment of his imagination?

One of these days it would be nice if someone had the guts to call their bluff and find out. That's how markets are supposed to work isn't it? Executive salaries are a classic example of market failure because some are ensuring that the bidding never really gets started.