Bankers’ pay is crazy. Footballers’ pay is not
The Daily Mail’s City editor, Alex Brummer, asks a question:
“At a time when bankers have been bitterly attacked for their greed in receiving huge bonuses again, where are the clarion voices condemning overpaid footballers?”
There’s a confusion here. It’s important to define what it is that is objectionable about bankers’ bonuses. Is it that no one should take home such colossal sums? Or is it that bank managements are paying out excessive amounts of money to their employees (at the expense of supine shareholders and idiotic pension fund administrators) and that this structure of compensation encourages reckless behaviour (exposing ordinary taxpayers to the risk of needing to bail them out again)? Is the objection one of social justice or economic efficiency? This is a distinction my good colleague Sean O’Grady has stressed on several occasions.
Brummer’s question implies that the answer is social justice; that the offence exists in the sums involved. Yet though that might be his answer, it’s not mine. My primary objection to bankers’ bonuses is one of economic efficiency. First, the banks should be using their profits now to bolster their capital cushion, rather than paying lavish remuneration to staff, as the Bank of England has urged.
Second, I think that the practice of paying investment bankers a (more or less) fixed share of the revenues they generate (see here), regardless of profits or write downs, encourages them to inflate dangerous credit bubbles and hide risk.
I think that social justice is an objection to bonuses, but not because of the size of the sums involved, but the privileged nature of the institutions doling them out. As we have seen, employees of too-big-to fail institutions get a vast chunk of the upside of the bank’s fortune in the good times, but bear almost none of the downside in the bad. For banks that have been rescued by taxpayers (receiving official support totalling £1 trillion according to the Governor of the Bank if England) to continue paying out huge state-underwritten bonuses to their staff, under the justification of “competitiveness”, is a bad joke.
In my view, there’s something wrong with bankers’ pay. And the system is fundamentally broken in a way that the remuneration system for footballers is not.
Of course, in one sense, footballers’ pay makes no more sense than that of bankers. There are some mediocre players on ridiculous salaries. The market is massively distorted by extravagant spenders such as Chelsea, Manchester City and Real Madrid, who agree vast pay deals to lure top players. Other clubs then agree to pay extortionate amounts to their own top players for fear of losing them to these predators.
The overall market is mad. All the revenues that clubs get in through the front door (and they have increased hugely thanks to pay-TV deals) flow out the back door in player wages. Some smaller clubs pay out almost all their turnover in wages. And even several of the bigger clubs run losses because of their wage bills (see here).
But there is a crucial difference between the insane remuneration systems of the banks and football clubs: if a football club goes bust, the state will not step in to save it. And the losses of clubs are covered by soft-headed owners, rather than taxpayers. That incidentally, is why, in my view, there is no justifiable public interest in the pay of hedge fund managers, who award themselves even more money than bankers. The investors in these funds need their heads examined, as Terry Smith has argued. But the bottom line is that if the typical hedge fund blows up, it cannot expect to be rescued by the state. Taxpayers are not underwriting the bonuses of hedge fund managers.
What is more, leaving aside the bulging tier of overpaid journeymen players, the very top footballers generally deserve their pay. Fernando Torres, Carlos Tevez, Wayne Rooney et al are paid more in a year than most fans will earn in a lifetime. But that’s because they have an extremely rare skill. These are the stars who win games. They are one of the reasons why people come through the turnstiles every weekend.
I do not doubt that some bankers are very skilled, but would anyone outside the British Banking Association seriously argue that their talents are as rare as the elite of world football? And unlike the employees of too-big-to-fail banks, footballers’ pay is not underwritten by taxpayers.
There is plenty that is wrong with Premier League football, as I have written on several occasions (see here and here), but the fact that it makes quality footballers as rich as Croesus is not one of them.
So perhaps that’s the answer to Brummer’s question about why people are angry about bankers’ bonuses but not footballers wages: unlike him, they can recognise there’s a difference.Tagged in: Alex Brummer, banks, bonuses, Carlos Tevez, daily mail, football, hedge funds, Premier League, taxpayers, too big to fail
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