George Bailey faces a bank run in It's a Wonderful LifeLate last year, Alistair Darling, the UK’s lord of the Exchequer,introduced a one-off 50 percent tax on bonuses upwards of £25,000(around US$40,000). This is just a prelude to a 50 percent income taxrate to be slapped on the highest earners beginning next fiscal year.City executives cried foul and threatened to leave for less oppressivefiscal climes However, both the French premier, Nicholas Sarkozy, andthe German chancellor, Angela Merkel, thought it was an initiativeworth emulating, and pressure has started to mount on US presidentBarack Obama to follow suit. Is this just or is it simply giving way toenvy and vengeance in the season of good cheer?

Green shoots notwithstanding, the ghost of the recent economiccrisis still looms large and heavy on most of us. The record profits onwhich those bankers’ bonuses are based would not have been possiblewithout government bailouts. And even if some banks never receivedpublic money directly, nonethelesss they equally benefited fromtax-payer financed liquidity. Without such guarantees, they would havegone the way of Lehman Brothers and Bear Stearns. Instead of treatingthemselves to obscene bonuses —half of their annual revenue or $17B forGoldman Sachs this year— bankers could use the money to shore upcapital and secure their positions..

This discussion brings us back to the issue of bankers’ pay. ForHarvard’s Lucian Bebchuk, there seems to be a consensus thatcompensation structures of financial firms incentivize excessiverisk-taking, while shielding agents from losses and a substantial partof their responsibilities. Bankers’ pay focuses on short-term resultsand rewards them accordingly, even if outcomes are later on reversed.Likewise, though stock options may align bankers’ interests withshareholders, they still leave out the concerns of significant groupsof bondholders, depositors and the government as ultimate guarantor ofthe bank’s stability. To avoid instances of “pay without performance”,Bebchuk suggests delaying the time when options could be cashed outfrom when they vest and tying compensation to a broader basket ofshares and bonds, aside from common stock.

For his part, Steven Kaplan, from the University of Chicago, isquite sceptical about the negative impact of bankers’ remuneration onoverall economic health. He thinks, rather, that the blame lies ongovernment regulators who implemented highly expansionary monetarypolicies for too long due to largely political reasons. What we shoulddo now is to raise pro-cyclical equity capital requirements andcontingent long-term debt. That means increasing equity percentageduring booms and converting debt into equity during busts. In effect,it consists in “saving for a rainy day” instead of “making hay whilethe sun shines”.

Despite their differences, Bebchuk and Kaplan coincide in theirfundamental strategy. Both seek to change bankers’ behaviorsexclusively by tweaking individual economic incentives. But thesearen’t the only factors that affect conduct nor are they always themost important ones. Incentives aren’t physical objects and a $100 billmeans different things to different people. In consequence, they reactin an unpredictably different manner.

That’s why none of the measures that Bebchuk and Kaplan recommendare foolproof. At most, they could only be followed prudentially.Setting a later date for cashing out options from when they vest orlinking pay to more indicators than the price of common shares may makesense, but it’s not the government’s role to decide when or which otherindicators to consider. Similarly, increasing procyclical equitycapital requirements and contingent long-term debt may be healthy, butthe exact percentage is again a moving target, even for government.Overshoot it and you prevent banks from lending money, which is whatthey should be doing in the first place. This also explains why theevidence thus cited on the relation between a variety of pay packagesand corresponding employee performances is far from conclusive. In agiven year, a bank executive could forego all salary and bonus, yetstill give it his very best.

As for the much bandied around danger of a brain-drain in thebanking sector or a stampede from certain jurisdictions once highertaxes come in place, I seriously doubt that any of this would happen.More things should tie a person to work in a firm or a city besidesmoney. Otherwise, it would be best to let him go.

Banking is essentially taking care of other people’s money and assuch is invariably discreet and boring. It’s not “doing God’s work” asLloyd Blankfein of Goldman Sachs infamously alleged, but a job wherereckless thrill-seekers and risk-takers need not apply. Neither shouldwe buy into the claim that technology and globalization have magicallytransformed bankers’ productivity to justify stratospheric incomes.Money doesn’t grow simply because it changes hands faster, but becauseit is carefully invested. If ever, increased connectedness has alsomade all of us even more vulnerable.

Perhaps dwelling too much on the rules and the moves of bankers’ payas if it were a chess game distracts us from an even more importantarea of reform: to begin with, choosing the right people with whom toentrust our money. And that is a question of character more thananything else.

Alejo José G. Sison teaches Business Ethics at the University ofNavarre and is President of the European Business Ethics Network(EBEN):


Lucian A. Bebchuk, “Fixing Bankers’ Pay”, The Economists’ Voice (, November 2009.

Steven N. Kaplan, “Should Banker Pay Be Regulated”, The Economists’ Voice (, December 2009.

Alejo Jose G. Sison

Alejo José G. Sison teaches ethics at the University of Navarre and Georgetown. His research focuses on issues at the juncture of ethics, economics and politics from the perspective of the virtues and...