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LATEST NEWS UPDATES | Bonus Excesses and Outrage by Jaimini Bhagwati

Bonus Excesses and Outrage by Jaimini Bhagwati

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published Published on Dec 18, 2009   modified Modified on Dec 18, 2009

Government and regulators need to focus on the systemic risk engendered by excessive compensation.

As calendar year 2009 draws to a close, it is bonus season for the financial sector in the West. In the last several months, the need to cap bonuses and compensation packages has been extensively discussed in the context of limiting the future impact of the next financial sector breakdown. On December 9, 2009, the UK was the first to announce a one-time 50 per cent tax on bank bonuses above 25,000 pounds. France is likely to follow suit and in public opinion polls in the US, 75 per cent of respondents registered their anger about bonuses. The Greek government proposes to tax bonuses of private sector bankers at a marginal rate of 90 per cent.

Since the mid-1990s, financial sector compensation in western countries has steadily increased on an exponential basis to reach ludicrous levels compared to real sectors. Joseph Ackermann, chairman of the Deutsche Bank board, is reported to have recently commented that he is amazed at how much more money he makes than his doctor brother in Switzerland. In the aftermath of taxpayer-funded bailouts and with continuing high levels of unemployment, it is to be expected that there is outrage at a popular level about bonuses. Governments have to be seen to be responding by linking compensation to long-term performance.

In contrast, in India there has been little criticism about the growing divergence between salaries in the public and private segments of our financial sector. The total cost to company for top executives working in private banks, insurance companies and NBFCs, stock exchanges and depositories may now be around Rs 5-10 crore per annum. Compensation at comparable levels in public sector banks and insurance companies (e.g. SBI, LIC) is much lower. For now, the consensus seems to be that private companies should be free to decide salaries and allowances for their personnel. As we move towards greater private and international ownership of Indian financial firms, the government and regulators would need to focus on the issue of systemic risk engendered by excessive compensation.

The extraordinarily high financial sector compensation in some developed countries has had the unintended consequence of diverting a higher-than-warranted proportion of young talent to this sector. In India, compensation in the largely publicly-owned financial sector is better aligned with that in real sectors. At the same time, the development of Indian financial markets and particularly capital markets has led to some highly visible super-winners. Further, once licences are obtained for real sectors, such as mining and telecommunications, there are huge first-mover advantages. In an overall sense, we may be in the “robber baron” phase of our development somewhat akin to what developed countries experienced up to the 1950s.

Consequently, at a mass middle class level, an unhealthy fascination with getting rich quick is growing. The all-too-frequent reports about CEO salaries and the impact of stock market movements on the net worth of individuals are probably a reflection of such thinking and reinforce this mindset. The widespread nature of wanting to become rich and influential whatever it takes was clearly in evidence in the Satyam fiasco. This episode highlighted systemic shortcomings in corporate governance and the nexus between Satyam’s sponsors and finance/accounting professionals, including academics and regulatory authorities. The saving grace was that the government quickly put Satyam back on track again.

On balance, it is likely that there is already some misallocation of talent in India. This is not to suggest that high compensation levels are necessarily inconsistent with promoting development. However, does this all-too-visible Indian interest in becoming wealthy very quickly stem from a desire to emulate high achievers? If the motivating factor is to achieve excellence, it would drive individuals to create wealth. At the same time, we should ask ourselves why is it that we do not as yet produce, for example, any passenger aircraft, sophisticated medical equipment or build underground metro rail-lines on our own. Clearly, we need larger numbers of highly trained specialists. To promote greater expertise in engineering fields, we need to make careers in technical disciplines more attractive.

As opposed to public outrage, is there a general sense of complacency in the Indian middle-class about development objectives, including, for example, the state of public health? I remember an Indian doctor, who chose to work exclusively with poor patients on the outskirts of Delhi, remarking about 30 years ago that malnutrition caused most health problems for the bottom 25 per cent of our population. On a separate but related note, a few weeks ago I chanced upon a BBC documentary on the incidence of polio in India. India is among four countries, which is still afflicted by polio — the other three are Afghanistan, Nigeria and Pakistan. The camera kept zooming in on cooking vessels covered with flies, under-nourished children and harassed-looking adults in urban slums. I also heard about violin virtuoso Itzhak Perlman’s charity performance at the Lincoln Centre in New York on December 2, 2009 to raise funds for the eradication of polio. Perlman’s legs were affected by polio as a child and a documentary on the incidence of polio in India was shown prior to the recital. Such news reports are unsettling even as we bask in the international coverage about our 7.9 per cent GDP growth in the quarter which ended in September 2009, and projections about growth topping 8 per cent in 2010-2011 . To summarise, we need to figure out how best to reorient public attention and our middle-class youth towards the unfinished agenda in the real sectors and development of excellence in technical and engineering disciplines. At a minimum, we need to collectively closely follow and push decision-making circles for faster progress on “real” issues. The long to-do list about which Indians should be constructively outraged is all too familiar. For example: (a) roads; (b) public health; (c) power; (d) literacy. At an individual level, we could encourage the young to not allow their minds to be dominated by news and allegations about the rich and the powerful. It may help to get our priorities right by reminding ourselves, as one of our New Year resolutions, of the effort which remains to be made to provide the basics to Indians who will have little exposure to financial markets for decades to come.

j.bhagwati@gmail.com

(The author is India's Ambassador to the European Union, Belgium and Luxembourg. Views expressed are personal)


The Business Standard, 18 December, 2009, http://www.business-standard.com/india/news/jaimini-bhagwati-bonus-excessesoutrage/379852/
 

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