Investment Banking Pay

Sunday, November 29th, 2009 - Employment, politics, recruitment, salary, sunday thoughts


Investment Banking Pay

Hello Barclays, Goodbye Lehman

With the publication this week of the Walker Review, the issues which came to drag the global economy, and particularly the British economy, down into recession have been revisited by the media, particularly when Walker himself gives a huge pointed sign to them that they should.

One of Walkers main conclusions is that UK banks should be forced to publicly disclose the number of their employees who earn more than £1m a year. Walker found in the collapse of Royal Bank of Scotland, that former CEO Sir Fred Goodwin was paid £4.6million in his final year, but that 250+ employees were paid MORE than Godwin. This was immediately met with growns of derision from the British Bankers Association, who said that – again – that walker’s proposal would lead to a banking brain drain from the UK to other more amenable and less regulated locations.

I think actually, they are moving for another reason!

A lesson from Jim Callaghan

If you have read anything about the wealthy in the last few months, or had a sense of history spanning back to the 1970’s, you will know that in a then crashing to the ground Labour government, that many celebrities and high-powered persons in the late 1970’s were fleeing Britain because of poor economical management resulting in high taxes. They hence fled to other countries, with one Barry Gibb suggesting he was going overseas directly because of the tax issues associated with a near 90% tax rate.

Come forward some 30years, and Labour’s proposal to do the same tax hike solution to an economic crisis – one which they have again added kindling to locally – having the same result. Property and relocation agents are holding sold out seminars which people pay to attend, to hear about the wonders of Switzerland.

Global Investment Banking Pay law

What Walker proposes is already law in Australia, Switzerland, Germany and America – specifically New York state law. In Hong Kong, the real base of global operations of HSBC, the bankers have to be named, not just listed as a number. Walker commenting in the Sunday papers today is against naming individual bankers, fearing that it will then become a brain-drain issue.

If they were fleeing because of being exposed as earning more than £1million, and where one million of the local currency seems to be the legal exposure limit, and with the pound still being a multiple greater than all of those currencies, they would be exposed at a far earlier date.

British Investment Banking Effect?

How many people could this affect? John Purcell of the same-named City Head Hunters in conversation with the BBC estimated that less than 10,000 city investment bankers earned more than 1million pounds, while some 280,000 people work in finance in London’s Square Mile and Canary Wharf area. – http://news.bbc.co.uk/1/hi/uk/8380284.stm In the new boards investigations of Fred Godwin’s management of Royal Bank of Scotland, data which they provided to Walker, they found that just over 200 employees earned more than Godwin’s £4.6Million package in 2008.

Walker’s Terms of Reference for the review were to examine corporate governance in the UK banking industry and make recommendations, including in the following areas:

  • the effectiveness of risk management at board level, including the incentives in remuneration policy to manage risk effectively;
  • the balance of skills, experience and independence required on the boards of UK banking institutions – he recommends that all bank board members should be qualified bankers
  • the effectiveness of board practices and the performance of audit, risk, remuneration and nomination committees;
  • the role of institutional shareholders in engaging effectively with companies and monitoring of boards; and
  • whether the UK approach is consistent with international practice and how national and international best practice can be promulgated – well, it will now that it will list bankers on more than £1million

Walker has as many commentators point out, been caught in the media crossfire: governments who have bailed out banks, and bankers wary of losing income.

Conclusion of Walker Review

A personal thought on listing but not naming British based bankers who earn more than £1Million/pa – Walker got it right. He rightly justifies the recommendation with the following:

Investors know the levels of pay and remuneration under disclosure via the Companies Act. But they are currently hidden from information to be able to assess the distribution of pay within a bank. That is fundamentally wrong, and does not encourage investment

So, don’t reveal the pay and have a risky investment; expose, and you might lose a few bankers to Switzerland, where their employer would have to expose their pay anyway?

The reason bankers are thinking of moving off shore is tax, not pay.

Good Luck!

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