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Dr Valerio Potí, Lecturer in Finance at DCUBS, on Pay and Bonuses in the Banking Sector

27th May 2009

High salaries and lavish bonuses have come under intense scrutiny since taxpayers have learnt that they have to rescue banks. Worst yet, it has emerged that the ‘bonus culture’ may have created incentives to engage in reckless lending and other ill-advised practices. So, are high salaries and bonuses part of the problem or even justified?

Dr Valerio Potí, Lecturer in Finance at DCUBS

The tasks that the financial industry must accomplish are intrinsically complex. This means they need dedicated and competent staff, especially in key roles. The real issue, then, is how to attract and retain talent and, at the same time, make sure that those who are paid well do not take the bank for a free-ride or, worse, bend opportunistically the rules to their advantage.

There are mechanisms that can help achieve this. For example, little known in Ireland, but well known elsewhere, are the so called “bonus banks” where bonuses are accumulated over the years and paid out only when evidence accumulates that long term performance matches short term results.

A related issue is the pay levels of those who are in charge of monitoring and regulating the financial industry. If Central Bank officials receive a fraction of what their supervisees earn, chances are that a good few amongst the latter can outsmart the former. Because, by and large, this is how things stand in Ireland, it is not surprising that regulators seemed to have no idea of the troubles that were developing in the financial sector.

In the US, several Federal administrations engaged in financial supervisory activities have been given the possibility to award key personnel higher salaries and benefits under the so called Law Enforcement Availability Pay (LEAP). In Ireland, the debate seems to be going in the opposite direction, with widespread calls for indiscriminate cuts in civil servants' salaries.

If this happens, there will be fewer, not more, competent people in key places. Chances are, then, that there will be more, not less, regulatory mishaps.

The above article appears in the 24th May 2009 edition of the Sunday Independent