“100 leading progressive figures from across the centre-left, civil society and from all corners of the UK, have today called on the government to establish a High Pay Commission to curb excessive pay.” So begins the press release from the pressure group, Compass. Calls for restraint on high pay are hardly surprising at a time of recession and falling profits. Many banks are still paying large bonuses to top executives, despite some of the banks having to be rescued by the government. Other firms too are still rewarding their senior executives with huge bonuses despite poor performance.
But are the members of Compass right to say that “the unjust rewards of a few hundred ‘masters of the universe’ exacerbated the risks we were all exposed to many times over” and that “a High Pay Commission is needed to deliver a fairer, more stable and sustainable economy for the future”? The following linked articles look at the issues.
Coalition calls on government to regulate high pay Guardian (17/8/09)
Think tank Compass says ‘masters of universe’ must be reigned in Telegraph (17/8/09)
The Big Question: Should there be a commission into high pay, and how would it operate? Independent (18/8/09)
Darling dismisses pay commission BBC news (17/8/09) (see also video)
Demands for ‘high commission’ to cut pay and bonuses of executives Scotsman (18/8/09)
It is time for action on excessive pay Guardian (17/8/09)
Top executives pocket huge bonuses despite recession Independent (518/8/09)
Investor group ABI wants guaranteed bonuses stopped Guardian (17/8/09)
It’s an unequal struggle to rein in those with the most The Herald (18/8/09)
Would a High Pay Commission solve inequality? Management Today (17/8/09)
Bankers’ pay: Coining it in Guardian (18/8/09)
Will Britain’s second dose of anti-bonus fever have a useful payoff? Telegraph (17/8/09)
Merit Pay Times Online (17/8/09)
Questions
- What are the arguments for and against establishing a High Pay Commission?
- To what extent are the rewards of senior executives a reflection of their marginal productivity?
- Discuss the extent to which the bonus system could be redesigned to align the incentives of such a system to the long-term performance of the company.
The large bonuses received by bankers, often amounting to more than a million pounds, have been contentious for many years. With the banking crisis and subsequent recession, and with both public and government outrage at the size of the bonuses, many thought that the days of such bonuses were over. But such is not the case. “There has been public disquiet that leading banks – which have been seen as a major cause of the financial crisis – have been receiving taxpayer funds, but are not prepared to change their traditional culture of awarding big bonuses to key staff.”
The following articles look at what has been happening to senior bankers’ remuneration in recent months. But what are the market conditions that allow such rewards to continue? Are they a reflection of the marginal productivity of bankers or of their market power, or what?
RBS to keep paying bonuses despite 1bn first-half loss Telegraph (7/8/09)
Lloyds chief plans bonuses for ‘spectacular job’ in making £4bn loss Telegraph (6/8/09)
CS toxic bonuses are up 17%, but gains can’t be realised for four years eFinancial Careers (7/8/09)
Banks: Look, don’t touch Guardian (8/8/09)
Analysis: The plan’s the thing Times Online (7/8/09)
Cutting our bonuses would hit the taxpayer, says RBS Citywire (7/8/09)
France targets bankers’ bonuses BBC News (7/8/09)
Sarkozy weighs into debate over banker bonuses after BNP Paribas compensation sparks anger Los Angeles Times (7/8/09)
Knotting the purse-strings The Economist (6/8/09)
Pay and politics The Economist (6/8/09)
Questions
- Explain why many senior bankers have continued to receive huge bonuses. To what extent is oligopoly theory relevant to your explanation?
- To what extent do the size of the bonuses reflect senior bankers’ contributions to (a) the productivity and (b) the profits of their bank?
- If bankers are to be paid bonuses, what is the best form for these bonuses to take? Consider the incentive effects in your answer.
- Should bankers’ bonuses be regulated and, if so, what criteria should regulators use for determining the acceptable size of bonuses?
The global economy has been in a recession since December 2007, but have we now passed the worst of it? Whilst companies are still going bankrupt, unemployment is still rising, the housing market is still looking pretty gloomy and government debt surely can’t go up anymore, there are indications that we’ve reached the bottom of the recession. There are murmurs that the economy may start to recover towards of the end of the year.
But, of course, economics wouldn’t be economics if there wasn’t considerable disagreement. Many still believe that the worst is yet to come. According to the OECD, the recession is ‘near the bottom’. Yet, output in the UK is still set to decline by 4.3% in 2009, and by 2010 the budget deficit is predicted to have grown to 14%. Unemployment is at its highest since November 1996, but US consumer confidence is said to be rising and the pound is climbing. Read these articles and make up your mind about the state of the UK and global economy!!
Business and Consumer Surveys (After following link, click on chart) European Commission, Economic and Financial Affairs (29/6/09)
Pound climbs against euro as King sees signs recession easing Bloomberg, Lukanyo Mnyanda, Gavin Finch (20/6/09)
Bank says banking crisis easing BBC News (25/6/09)
First signs of optimism returning to some parts of financial services CBI PRess Release (29/6/09)
Darling and King agreed on tentative recovery Guardian, Ashley Seager (17/6/09)
Sharp contration for UK economy BBC News (30/6/09)
Housing market knocked by price falls Moneywise (22/6/09)
OECD says recession ‘near bottom’ BBC News, Steve Schifferes (24/6/09)
US Federal Reserve says recession is ‘easing’ Telegraph, James Quinn (24/6/09)
Public borrowing at record levels BBC News (18/6/09)
Leading index suggests recession easing UPI.com (18/6/09)
US consumer confidence up in June BBC News (26/6/09)
Blow for housing market as prices fall The Independent, David Prosser (22/6/09)
Most UK businesses freeze pay as recession bites, CBI says Telegraph, Peter Taylor (23/6/09)
Questions
- What are the typical characteristics of a recession? Do the current statistics of the four main macroeconomic objectives fit in with what economic theory tells us?
- Which policies would governments normally implement to get a economy into the expansionary/recovery phase of the business cycle and how do they work?
- Why is consumer confidence so key to economic recovery?
- What type of banking regulation is needed to prevent a similar crisis happening again?
- Movements in the housing market are often seen as indicators of the state of the economy. Why is this?
Since Labour has been in power the gap between rich and poor has remained more or less unchanged – a fact that might be surprising given a Labour government and fiscal policies that have become increasingly redistributive in nature. In fact income distribution in the UK has not changed since 1991 according to Office for National Statistics figures. Economists measure income distribution in various ways, but two of the key indicators are the Gini coefficient and the Lorenz curve. For more information on income distribution and some useful data, you may like to download an income data spreadsheet from the IFS (zip file). If you are interested in where you fit into the income scale, then you may also like to try the Institute for Fiscal Studies interactive income model. Why not try a range of different scenarios to see where different levels of income fit into the overall income scale.
UK income gap ‘same as in 1991’ BBC News Online (16/12/08)
Questions
- Define the terms (a) Gini coefficient and (b) Lorenz curve.
- Using diagrams as appropriate, show how the Lorenz curve will change when income distribution becomes (a) more equal and (b) less equal.
- Explain how the value of the Gini coefficient will change as income distribution gets more equal. With reference to the IFS spreadsheet (linked to above) descibe how the Gini coefficient has changed in recent years.
- Discuss reasons why income distibution in the UK has stayed the same since 1991 despite a series of redistributive measures adopted by the Labour government since 1997.
The article linked below looks at the extent to which economic downturn and rising inequality are likely to affect crime levels in the UK. Traditionally the view has been that an economic downturn will raise crime, but is it necessarily the downturn that is causing the increased crime?
Consumed by crime Guardian (24/9/08)
Questions
| 1. |
Explain why an economic downturn may lead to increased levels of crime. |
| 2. |
Discuss the extent to which deregulation of markets may have exaggerated the relationship between crime and the level of economic growth. |
| 3. |
Assess the view espoused in the article that “a culture obsessed with material goods” and “competitive individualism” have led to stronger link between crime and economic growth. |