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Jeremy Corbyn pay row shows costs of bank excess

UBS CEO suggests criticism of high remuneration driven by envy
Compensation
Leader of the opposition Jeremy Corbyn speaks at the Labour Party Post-Budget Rally in West Bromwich, U.K., on Nov. 23. REUTERS/Darren Staples

By Christopher Thompson

LONDON (Reuters Breakingviews) - The debate over bankers’ pay is back with a vengeance in Britain. In one corner stands UBS CEO Sergio Ermotti, who suggested that criticism of high remuneration is driven by envy. On the other, leader of the opposition Labour party Jeremy Corbyn, who ramped up attacks on bankers after a sell-side analyst criticized his policies. The row shows the enduring costs of bank excess.

Corbyn’s criticisms of Morgan Stanley boss James Gorman’s pay and “speculators” in general seem a little out of date. Regulators across Europe have limited bonuses since the financial crisis, and banks have cut remuneration. Average bank CEO pay has fallen, in real terms, by 49 percent since 2006 according to analysts at New Financial. The think-tank reckons that pay as a proportion of revenues at investment banks declined by 9 percentage points to 37 percent over the decade to 2016.

Still, bankers are an easy target for Corbyn. The fact that CEO salary is still on average $11.4 million a year underlines their stratospheric levels of remuneration before the crisis. True, that’s not out of whack with other firms, as Ermotti pointed out with a jibe at “big tech” companies. But neither Google nor Amazon took state capital; nor do they benefit from an implicit government guarantee which keeps their funding costs low.

Shareholders have also suffered. Over the past decade European banks’ total shareholder returns, including reinvested dividends, have averaged minus 39 percent compared with a positive 48 percent for the STOXX Europe 600 index. Leave out the crisis years of 2008 and 2009, and banks still only returned 10 percent, barely a 10th of the broader index.

Bankers might dismiss Corbyn’s broadside as hyperbole. There is nothing in Labour’s recent manifesto which explicitly targets banks. That would be naive. The risk is that the UK Conservative government now feels that it has to match Corbyn’s invective. And there’s plenty a Labour government could do to attack banks, such as imposing transaction taxes or nationalisation. That would hit Britain hard, if it meant bankers left for more business-friendly countries, but shareholders would be wise to act first.

CONTEXT NEWS

- The leader of Britain’s opposition Labour party Jeremy Corbyn criticised the levels of bank remuneration and said that bankers are correct to regard him as a “threat”. The comments came after U.S. investment bank Morgan Stanley’s analysts warned of the risks of Corbyn winning power.

- In a video posted on Twitter on Nov. 30, the 68-year-old socialist said he wanted to transform what he regards as a rigged economy that rewarded “speculators” at the expense of ordinary people.

- Corbyn’s riposte also comes after Sergio Ermotti, chief executive of the Swiss bank UBS, defended the sector’s high remuneration levels.

- “I think this discussion is made by people who are maybe frustrated that they do not make that kind of level of money,” Mr Ermotti said a banking summit on Nov. 30, according to a Financial Times article.

- At the same summit Andreas Treichl, chief executive of Austria’s Erste Bank, said that he was “paid less than the Goldman Sachs doorman”, according to the FT.

- At a separate meeting on Nov. 29, Mark Carney, governor of the Bank of England, suggested that a cap on bankers’ bonuses could be scrapped once the UK left the European Union.

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