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News : US Economy Last Updated: Feb 25, 2013 - 7:21 AM

Financial crisis "little more than a blip for the pay of bankers"
By Finfacts Team
Feb 22, 2013 - 8:27 AM

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A paper on UK bankers' pay says the financial crisis seems to have been so far "little more than a blip for the pay of bankers."

The paper, 'Bankers and their Bonuses,' [pdf], by Dr Brian Bell and Prof John Van Reenen of the Centre for Economic Performance at the London School of Economics, says: "if we focus on all those workers in the top percentile, their average wage rose from £277,800 in 2008 to £284,100 in 2011, a rise of 2.3% and their share of the overall wage bill fell, as the mean wage for all workers rose by 3.7%. In contrast, the bankers in the top percentile saw their average wage rise from £325,100 to £353,100, a gain of 8.6%."

  • The share of total UK income taken by the richest 1% of the population (one in every hundred people) has more than doubled over the past three decades - - from 6% in 1979 to 14% in 2009;
  • The share of annual earnings taken by the richest 1% rose by about two percentage  points in the decade leading up to the 2007/08 financial crisis (from 7.1 to 8.9 percentage points, a rise of about 25%). Two-thirds of this increase was solely due to  the increase in bankers’ bonuses;
  • The share of national income going to the top 1% fell after the crisis by 0.5 percentage points between 2008 and 2011;
  • But bankers’ share of total income has not declined since the financial crisis. And in terms of the risk of job loss, they have done no worse than other people, even when compared only with other groups of the most skilled employees in the economy;
  • These calculations underestimate the amount going to bankers because they focus on cash (salary and bonus). New disclosures by the Financial Services Authority reveal that for 1,408 key employees in 10 London banks, cash payments in 2010 averaged £568,000 per year, but including expected payments (in cash and equity) brought their average pay to £2m;
  • This group of bankers therefore earned £2.8bn – roughly six times more than the  combined total pay of the CEOs of every company in the FTSE 100 (£470m).

With the European Commission looking likely to set a cap on the ratio of bankers’ bonuses to their salaries, what are the right policies on high pay? The authors comment: "If bankers’ pay has a large component of economically inefficient ‘rents’, then the best approach is to improve financial regulation to stop banks earning excess profits.

"Many moves have been made to improve regulation, but it is unlikely that the risks of ‘too big to fail’ will ever be adequate regulated. In this case, some pay controls may be needed as a backstop to reduce incentives for excessively risky behaviour by bankers."

Last year, McLagan, a consultancy, in a report for the Association for Financial Markets in Europe, representing Europe’s wholesale financial markets said: "In 2011, total remuneration in aggregate across survey respondents’ banking and capital markets businesses was down 16% from 2010 and 18% from 2009. Total remuneration was down 24% from 2007, or 30% on a per capita basis. In terms of the published view, staff expense recognised in 2011 (calculated in line with international accounting standards) varied less, down 7% year-over-year and only 2% from 2009."

Performance and remuneration in investment banking - findings of an industry study by McLagan

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