Posted on February 5, 2009 by

Capping Salaries and Bonuses is not the Answer

Ok it is the answer if you are a politician trying to capture popular appeal.

But to ‘fix’ the current credit crisis, Mr Obama and Mr Brown (who have the bigger job of saving the world!), this is not the answer.

Setting an arbitrary level of salary and bonus payment which is unrelated to market forces will not help overcome the problems the industry faces. Right now the industry needs to attract and retain the best and brightest not drive them away.

In the US, UK and around the world, a number of financial services organisations are now in public ownership or heavily supported by taxpayers.

If Governments wish to set salaries and bonuses they should do so as shareholders via normal channels such as board representation and through appropriate governance structures such as remuneration committees. Now is not the time for Governments to stamp all over good Corporate Governance! Rather they should be seeking to reinforce it.

Of course, if Governments do not own shares their options are more limited, however, providing support appears to be coming with strings attached and Governments seem intent on extracting their pound of flesh. But at what price?

The Lex column described the capping of salaries in the US post President Obama’s statement and the fine print around it as a ‘muddle’ and that’s exactly what it is.

We have previously commented on the culture of financial services companies, the importance of the ‘right’ culture and why bonuses are not the real problem.

Shaping culture through the interaction between the Strategy map and Risk map

Linking Performance and Risk – so what is the problem?

City bonuses are not the problem, however a narrow focus on ‘A players’ is!

One of the big issues that must be addressed by the financial services industry, and other industries, is the need to move beyond performance-only thinking. Business is fundamentally about balancing risk and reward. Over the last few years we have seen too much reward without fully appreciating the risk side of the equation.

Governments are now playing significant roles in the world’s financial services sector. They should use this position to demonstrate good behaviour, provide support and reinforce good governance processes and focus on re-balancing the industry back to one that understands the relationship between risk and reward.

We are in a credit crisis and a significant economic crisis. We need to address both quickly. Governments attempting to tap popular appeal via measures such as the salary cap in the US (and UK?) will only create disincentives, discourage talent from focusing on finding solutions to these twin crises and, most importantly, it does not create the right environment for recovery.

What do you think? Do you agree or disagree? Please leave a comment.