Bankers’ pay is crazy. Footballers’ pay is not

Ben Chu
bob diamonjpg 150x150 Bankers pay is crazy. Footballers pay is not

Bob Diamond and John Terry. "At least I earned mine"

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.

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  • bigbread

    Great post
    Bread and circuses are still with us.
    Sheep do not protest I am afraid,and most football fans lives are totally bound up with the meaningless pursuit of ’silverware.’

  • B007nd

    Footballers all have offshore companies they use to avoid tax. The Banks are the ones left to foot the bill when a club goes bust yet the star footballers responsible for their “success” still get paid and still avoid tax. Comparing a footballer to a banker? Hysterical!

  • Dorothea

    The subject of salaries disguised as fees (and bonuses) should be reviewed: Mr Cameron won’t work on this one too hard, I’ll bet.

  • Suarez from the car park…

    Footballers are not criminals. Bankers are.
    If you don’t like the footy salaries then cancel your sky subscription and dont go to a footy pub. 10% fall in subs numbers and the payments and salaries will fall dramatically.

    Bankers can be replaced overnight – and regularly are. Exceptional peformance doesnt stay that way and banks rely on turning over staff.

    Bankers did
    1. Use repurchase agreements to hide bad assets with other banks at Shareholder report time, and then buy them back afterwards (lehman’s went bust due to this). Marking these contracts as sales is criminal – and the auditors were clearly turning a blind eye. By the time the merd hit the fan, the banks were so far in they were going to bring down the whole system.

    2. knowingly bundle bad loans with good to create CDO’s (mortgage bonds) to sell. Ratings agencies would sample the loans in a bond to rate it and if non-performing loans were found, would reject it. Problem is, the constituent loans were just dropped back into the pool from whence bonds came – so with the sampling technique, every loan good AND bad would eventually get into a bond with a AAA rating. All they needed were more loans for the pool as the banks made money on the transaction charges for selling the bonds.
    Can you spell sub-prime?

    It’s not even that the banks are taxpayer supported. Its because they are scum criminals that would without hesitation take the food off your child’s plate and the roof from over your head.
    The result as we see, is impoverishment through inflation as the ordinary person pays the price.

    They don’t deserve the oxygen they breathe.

  • JackieSH

    Man city council will save £400000 by closing libraries, swimming pools etc. Any chance of a whip round from the multi millionaire footballers – they could contribute £100000 each in the same way the rest of us could manage a tenner. Whats more worthwhile Wayne and Coleen, a new flash motor and a couple of Prada bags or a community swimming pool?

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