George Kerevan: Paying for superstars, but are they that good?

By George Kerevan
Published on Saturday 4 February 2012 00:00

WHY do bankers earn so much? If there’s a reason other than pure greed, then Royal Bank of Scotland chairman Sir Philip Hampton is whistling in the wind when he says bankers’ pay has been “high for too long” and needs “corrected”.

Hampton is not the only senior banker making these noises. On Thursday, the chief executive of Deutsche Bank, Josef Ackermann, warned of a “social time bomb” resulting from inequality. His solution is not to slash bonuses. Instead, Mr Ackermann recommends that top earners give more to charity. He himself is in line for a bonus of £6.6 million.

Ackermann is correct about growing inequality. In the UK, the share of wages (including bonuses) going to the top decile has increased substantially over the past 30 years. In the boom decade to 2008, the top 10 per cent of earners trousered an extra £20 billion purely due to their increased share of the national cake. Crucially, £12bn of this went to bankers. A similar pattern is found in most OECD countries, with the curious exception of France.

Morality aside, this skewing of rewards has worrying repercussions. The squeeze on earnings of the middle decile groups sharply limits consumption and growth. For a time we got round this by increasing personal debt. But then came the credit crunch. Meanwhile, there’s a limit to the champagne and Porches that investment bankers want to buy.

Economists have come up with two theories to explain why bankers receive a large share of income. First, there is rent capture. Globalisation has squeezed margins in manufacturing, leaving international finance as the one sector where super profits can be made – from trading, derivatives and M&A. Investment bankers then grab their personal share of these super profits.

You can’t end this by switching investment to manufacturing. That only depresses industrial profits even further – witness China today. Hence the debate concerning a financial transactions tax to “capture” bank super profits for social good. Unfortunately, that only works if you trust politicians more than bankers.

The second explanation is called “superstar” theory. It claims there are industries where only a few individuals possess the exceptional ability that generates gigantic returns for the company; e.g. football, pop music and (possibly) investment banking. Employers prefer to buy the superstar at a premium – or someone they hope is a superstar. The corporate jackpot from a successful investment banker runs into the billions, so it is worth gambling with giant bonuses all round in order to find one.

The superstar theory is hard to prove. Either way, the solution can’t be moral suasion. Toughening remuneration committees by appointing worker representatives, or encouraging shareholder intervention as suggested by Hampton, might reduce bonuses. But if a superstar mentality exists, such reforms are not going to reverse the last 30 years. Which brings us back to a bonus tax. Any takers?

Facebook in the shadow of Glencore-Xstrata

FORGET the Facebook IPO, another dot-com triumph of hype over experience. Facebook is a middling advertising company that earned some $3.7bn (£2.3bn) in revenues last year. That’s nothing compared with the projected merger between commodities giants Glencore and Xstrata

Glencore is the world’s biggest quoted commodity broker, trading just about everything – coal, oil, metals, wheat and the sugar in your coffee. Xstrata does most of the digging. If you eat it, drive it, wear it or heat yourself with it, Glencore-Xstrata has a finger in supplying it. Mark Zuckerberg eat your heart out.

The growth of the Asian economy has created a bottomless demand for raw materials. This is stimulating a major restructuring of capital-intensive mining. Worth some $88bn, the Swiss-based Gencore-Xstrata combination is expected to go on an acquisitions spree. First on the list is South Africa’s Anglo American, valued around $59bn. By acquiring Anglo’s business in diamonds, platinum and coal, Glencore-Xstrata could overtake its two Australian rivals Rio Tinto and BHP.

Of course, if the Glencore-Xstrata merger goes ahead, the bankers will collect. The fee pot for supervising the paperwork should be in the $140m range.

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unimpressedone

Saturday, February 4, 2012 at 09:30 AM

Why do we pay so much indeed? RBS could have employed someone off the street to head up their company and they couldn't have made a bigger loss than 'talented' Goodwin.' We pay peanuts and get monkeys' but in the world of banking we give them more money than could choke a horse and we still get monkeys.

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