Free Open Dissent by Mike Soden Page B

annual compensation awarded. The market is real and competition exists, and so remuneration committees, with outside help from compensation specialists, agree a contract with the executives. One might ask whether the interests of the executives should be in line with the shareholders to ensure that a conflict of interest does not exist. Experience suggests that synchronizingthe objectives of both parties leads to improved performance and growth. A return on capital is often viewed by the shareholders and the boards to be the best yardstick for performance. In financial institutions, because the amount of capital required is substantial and this capital in turn is leveraged highly, the returns on capital have tended to be high historically. If executives have the opportunity of earning large rewards for their efforts, the assumption is that the salary paid is not merely for turning up at work each day. Paying people to manage these complex businesses for success carries an implied contract of reward. The implied contract is that this payment is to ensure that satisfactory performance is achieved. The definition of satisfactory is laid out by the board and arrangements are put in place to compensate for better than satisfactory performance. Performance will frequently include the achievement of both short- and long-term goals. The problem is that if the institution fails to meet its growth targets and anticipated return on equity, the executives normally pay a high price for failure: the loss of their jobs in most developed countries, not necessarily in Ireland. What other occupations in the private sector can put a country at risk through poor performance?
    As taxpayers, we have discovered to our expense that systemic risk is real and creates, financially, the single largest moral hazard. If banks don’t examine the total framework of risk under which they operate, the directors are either inadequate for the challenge or are careless in the belief that they will be bailed out. The built-up frustrationof the public and small shareholders is palpable. How can those who have overseen the destruction of such wealth continue in their employment and be paid such outrageous amounts?
    The solutions to the banking crisis and its fallout being bandied about among the chattering classes seem to have a strong socialist underpinning. I lived in Norway for several years in the late 1970s and early 1980s. On one occasion the Vice-chairman of Citicorp/Citibank visited Oslo. He mentioned that he did not fully understand the basis of socialism in the Scandinavian countries. So, at a meeting with the Governor of the Central Bank of Norway he enquired as to the practical meaning of the egalitarian concept. He asked if it would it be right to assume that if a citizen had two houses and his neighbour had none, he would keep one and give the other to his neighbour. The Governor replied, ‘Quite rightly, yes.’
    â€˜And’, continued the Vice-chairman, ‘if you had two cars and your neighbour had none, you would keep one and give your neighbour the other?’
    â€˜Rightly so,’ said the Governor.
    â€˜And what about if you had two shirts and your neighbour had none, would you give him one of your shirts?’
    â€˜Definitely not,’ said the Governor.
    â€˜Why?’ asked the Vice-chairman.
    â€˜I have two shirts,’ replied the Governor.
    The moral to the story is that it is always easy to give away something that you do not have.
    As the crisis develops we hear the cry ‘Let the rich pay!’ resonate in the press, on TV and in general conversation everywhere, the assumption being that the rich are not the ones who have already paid the price. After all, who else can pay at the end of the day? The revenue authorities may determine that those with income in excess of €160,000 per annum are designated as wealthy while those with assets in excess of €1 million are rich; however, we live in a