Winner takes all: what role did remuneration packages play in the global crisis?

Risk and reward ­ – such lovely alliteration makes this pairing feel so logical. But if there’s one thing we’ve learned in the past year, it’s that markets, economies, companies, investors and individuals rarely work in ways the average Vulcan would approve of. Much less so in a bull run such as the one that is currently crashing around our ears.

That could go some way towards explaining the hideously inflated remuneration packages director-level executives have been enjoying, while gold-plated capitalism has been filling in for an absent common sense. And the latter’s return from the dead amid what many believe is a global recession ­ – created on the back of a philosophy of taking on huge risks and not bothering to mitigate them properly ­ – explains why time is now being called on those inflated pay packets that, in not reflecting risks undertaken, exacerbated the disastrous consequences of those risks that we’re seeing now.

US regulators have not done much more than pay lip service to changing bad remuneration practices, focusing on financial institutions now governed by the rules of its banking bailout, involving a cap on pay and retainers for top brass while in public ownership. But in the UK last October, the Financial Services Authority published its ‘Dear CEO’ letter that it had sent to a reported 28 banks and building societies in the UK on the matter. Chief executive Hector Sants noted in the letter the “widespread concern that inappropriate remuneration schemes, particularly, but not exclusively in the areas of investment banking and trading, may have contributed to the present market crisis.

The FSA shares these concerns.” The note identified various commonplace remuneration policies, from including calculating payments on the basis of revenues without counterbalancing risk controls, not deferring parts of the bonus and creating a conflict of interest by permitting front office to influence back office as undermining systems designed to control various risks. It added that these practices showed no evidence of having been aligned with a company’s stated risk appetite.