Curbing City pay will give it competitive advantage

In the wake of financial collapse in autumn last year, after the British government pumped in massive amounts of taxpayers' monies into the financial system to prevent a complete meltdown (and the government became a large shareholder in the banks), the government (and the regulator, FSA) promised to curb huge salaries and bonuses of financiers. As the time passed, these promises have not materialised. Quite the contrary, in terms of bankers pay, it is business as usual. FSA published a proposal which is a grotesque version of the original promises. Assuming that taxpayers are half-intelligent, it looks like a deliberate insult to them.

The reason given why bankers' pay packages cannot be drastically reduced is that this would drive the top banking talent out of the City; that the best bankers will be poached to work abroad.

Behind such reasoning, there is an underlying assumption that the most talented people's choice of career is only financially driven. It is clearly not the case. If it were the case specific to the financial industry, it would also be true across the industries. Yet whilst some clever young scientist, doctors, analysts move to financial industry, this brain-drain is very limited. Top research institutions and universities, health service, civil service, oil and gas industry and so on, do not lament that the market is short of top talent as it is drained by the banking sector. There is no attempt of others, including very rich sectors like oil and gas, to match City salaries and bonuses.

This is no different to sport: we do not observe a lack of top talent in cycling and rowing, because football and golf pays much better. The lack of success in some sports is simply down to lack of tradition, infrastructure and resources to develop talent.

Huge majority of young people choose their career path based not only on financial reward, but also on what they like to do. Their interests, ambitions, prestige and a mission they sense play a big part. In any profession with a reasonably good pay and career prospects there is no shortage of young and talented newcomers. Only a small number of youngsters, very often not very talented or lacking clear interests, cynically decide on their career path based on financial rewards. In effect, perversely, astronomically paid banking jobs do not attract the top talent suitable for finance, but the greediest with loose morals, determined to do what it takes to make a lot of money for themselves. The pathology of that situation reached such a high point that stating this openly has been in vogue amongst the City "highfliers".

There is also evidence that it is not the most talented that get promoted to top jobs in finance, but the most greedy, aggressive, who know how to play company politics. It is enough to go to professional fora to realise that there were banking industry insiders, who were warning that a crisis such as the one that is happening was only a matter of time, since the business model became unsustainable. They were professionals but not the ones that were fast-tracked on their career ladder. The scale and character of the current financial crisis has shown that, to a massive degree, so called "financial professionals", especially on the top level, are unable to distinguish between taking a legitimate commercial risk and acting fraudulently or, worse, some of them choose to act fraudulently but use "taking a commercial risk" argument as an excuse for their actions. There is evidence that the CEO of one of the largest banks in the world does not understand such basics as mechanisms that govern balance sheets dynamics. Yet somehow he became a CEO.

Indeed it looks that big pay packets in finance attract the top talent: but not the one that banking really needs. It is a talent to use greed, skills in company politics, arrogance, posturing to cover monumental incompetence in climbing a corporate ladder. This ilk of people has hijacked the financial industry. No wonder the current crisis was caused by a criminally engineered pyramid scheme (as it was described in the first article on this blog "The largest heist in history") which is exactly the same in mechanics as Albanian pyramid schemes in 1996 - 1997.

But why did it happen that the bankers are paid so much? They are the first in the pecking order of financial management of a value creation. They manage billions and trillions of pounds, so only a tiny fraction of a percent of such amounts makes them millionaires. But this does not give them an automatic right to such a "tiny" fraction of the funds under their management. Interestingly bankers are not unique. Tax officials also collect and manage a huge number of billions of pounds. Yet no one argues that their pay should be based upon a revenue of their tax collection in such a direct way as the bankers', although they are the first in the pecking order of a state tax revenue collection and state finances depend heavily on their performance. However historically, in Biblical times as well as more recently (like in France in the 18th century) tax officials’ pay was also based, like bankers, directly upon the revenue under their management. Indeed, in those days, tax collectors had gained the same notoriety as the bankers did in the last few decades, since "greed is good" philosophy became an acceptable moral standard in finance. History proved that such approach was massively inefficient and, quite often downright fraudulent, as tax collectors were working, like today’s bankers, for their own benefit. There was also an argument, like today, that if their rights to pay had been curbed they would have been able to collect even less for a state. However modern states reasserted their authority in that respect and tax officials are paid now very decent salaries (even with some performance related pay), but in line with top professional jobs. This is how should be with the bankers as well.

And if, what is called, "top talent" leaves the City, it will be a great and desirable result of such policy. It will, hopefully, cleanse the City of greed, criminal incompetence and downright criminality that drove the banking industry to fraudulent activities (like pyramid schemes referred to above). If they get jobs in different financial centres, it will give the City competitive advantage: let them wreck competitors.

The financial sector will not be short of top talent. Assuming that top bankers' pay will be on a level, say, of top geologists' or economists' in the oil and gas industry, or brain surgeons, there will be plenty of very clever people with integrity, not driven by a sheer greed, that will develop their talents as real top financiers, not pyramid purveyors. This approach is not egalitarian or driven by some kind of equality: this is about eradicating pathology and restoring commercial sense to the financial industry.

PS. Cityboy on City bonus culture: "A banker's guide to bonus day".