Targeting top bankers’ pay won’t bridge inequalities

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WASHINGTON: Cracking down on sky-high executive pay at western banks does little to address growing social inequalities, and it doesn’t change a flush financial sector’s inexorable pull on the best-trained workers.“In this … finance-dominated economy, unfortunately, a disproportionate share of our most talented youth went into finance, lured by the outsized compensation,” economist Joseph Stiglitz told US lawmakers in January.

“The costs to our society of this misallocation are incalculable,” added the 2001 Nobel laureate in economic sciences.

Several studies show there is a golden siren song of the financial sector that ends up luring too much talent from other, lower-paying sectors of society.

And it doesn’t only happen in western countries.

In an interview with The Atlantic monthly in late 2008, Gao Xiqing, president of the China Investment Corporation, which manages some US$200 billion of China’s foreign assets, admitted the call of financial industries “affects our country, too!”

“I have to say it: you have to do something about pay in the financial system. People in this field have way too much money. And this is not right,” he added.

The Group of 20 Nations’ Financial Stability Board will report next month on worldwide efforts to rein in excessive salaries and bonuses in financial firms — seen as a factor in the last global recession — aiming to set appropriate standards for  executive  compensation.

But some experts believe proposed reforms will not go far enough to resolve underlying concerns that the financial sector takes an unhealthy cut of society’s overall pool of talent.

“In earlier decades, our best students went into a variety of areas — some into medicine, many into research, still others into public service, and some into business,” said Stiglitz, who drew from his experience as a university professor.

Lately, he added, “some of America’s most talented young succumbed to the lure of easy money.”

A source close to the International Monetary Fund recently said “the real issue is creating value and distributing wealth, and understanding why banks are sitting on such a huge pile of money.”

But the G20’s investigation into executive compensation steers clear of the matter.

The leaders of the emerging and advanced economies in the G20 in September undertook the commitment “to act together… to implement strong international compensation standards aimed at ending practices that lead to excessive risk-taking.”

Their ultimate aim is “reforming compensation practices to support financial stability,” not to correct social imbalance.

Excluding emergency measures taken at the height of the crisis in 2009, Berlin, London, Paris and Washington have introduced reforms to adjust bank compensation — reducing cash and unguaranteed bonuses and making them untransferable for several years.

But they did not touch the bankers’ actual regular salaries.

While Obama has harsh words for the “fat cats” of Wall Street, he has also been careful to repeat ad nauseam that his government has no business limiting the salaries of private companies.

The financial capitalism that boomed in the 1980s went hand in hand with increasing social inequalities in many western nations.

According to the US Census Bureau, between 1980 and 2008, the median per capita income for 95 per cent of Americans increased three times more slowly than that of the top five percent.

In France, the more wealthy a person was from 2002 to 2007, the faster he got even richer, according to data from the National Institute of Statistics and Economic Studies.  — AFP