Rewarding failure

Updated Monday, 29th April 2013
When bankers get a hundred times more than the average private sector worker’s pension, what kind of signal does that send? 

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Sir James Crosby – the ex-boss of the failed bank, HBOS, who has just been censured by a Parliamentary committee, and has resigned his City roles - has been revealed to be receiving a pension of £700,000 a year, a hundred times more than the average private sector worker’s pension.  

This reveals how executive pay sends entirely the wrong signals as to how to run a bank.

On the upside, there are short term and long term share options or share schemes as well as the substantial salary. And if you lose your job, you still get the pension. So, why on earth not take risks with shareholders’ – and in this case – taxpayer’s money?  

The incentive is to take as much risk as possible to score the jackpot – for example Fred Goodwin’s £10 million bonus for acquiring ABN-Amro bank which brought RBS to its knees, knowing that failure will be rewarded not quite as handsomely but for much, much longer.  

Life expectancy for senior executives, whose stress levels are presumably reduced by knowing that they and their loved ones are always going to be financially secure, is much higher than the national average.

This has been going on since the days of Lord Hanson and so why is this still allowed to happen? The answer is that pension contributions are tax efficient up to a point – it would be interesting to know if Sir James Crosby actually contributed to his pension pot and how much tax HBOS paid on his behalf.  

Companies do not have to fully disclose how much they pay for their senior executives to received these gigantic pensions. And, since it is often the case that middle-aged executives move firm to become chairman or chief executive, it costs the companies concerned a fortune to make up the pot for say 10 years’ service but potentially 40 or more years of retirement.

And why, might we ask, are the terms more generous for senior executives than for their employees?  How many companies are offering final salary or even average salary pensions to employees?  Most have been switched to defined contribution schemes. Senior executives often have a separate scheme or special entitlements. Why should this be so?

Pensions are often called deferred remuneration. Do all the remuneration committees filled with senior executives awarding each other generous salary, bonus and share incentive schemes also take the pension into account?  No, that is the added sweetener which has been, until now, a well kept secret.

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