The G-20's war on bankers' pay

When leaders of the Group of 20 industrialised nations gather in Pittsburgh later this week for a summit, one item on the agenda will be compensation.

Yours, assuming you are a banker, not theirs.

Our elected and appointed representatives appear to be capitalising on public anger toward bankers and bailouts as an excuse for mission creep.

At a meeting earlier this month in London - a pre-summit summit, without the heads of state, to set the agenda for the summit - the G-20 finance ministers and central bank governors laid out a set of principles to prevent "excessive short-term risk taking and mitigate system risk."

In addition to the imposition of higher capital requirements and stronger prudential oversight, the officials want to introduce "global standards on pay structure" to better align compensation with performance and ensure financial stability.

Is there a connection? Or are governments using this as an opportunity to apply the Emanuel Doctrine - never let a serious crisis go to waste - enunciated by White House chief of staff Rahm Emanuel? It's an opportunity to do things you couldn't do before.

There is something unseemly about government setting private-sector pay. The fact that French President Nicolas Sarkozy and German Chancellor Angela Merkel are behind the initiative suggests an ulterior motive.

"It's the culmination of a 50-year campaign to reverse the results of Second World War, which saw the Anglo-Saxon system triumph over the European system," says Bernard Connolly, founder of Connolly Global, a London research firm.

"They are very close to reversing it," increasing the power of bureaucrats over markets.

There are two related strands underlying the drive to realign banker pay, according to Philip Whyte, senior research fellow at the Centre for European Reform, a London think tank. The first is the belief that financial sector pay is too high. The second is that the compensation structure contributed to the crisis, with incentives encouraging excessive risk-taking in pursuit of short-term profits.

My guess is most people think multi-million-dollar pay packages in the financial sector are outrageous, especially relative to recent performance. I'd also guess that most Americans, aspiring to wealth themselves, don't want bureaucrats involved.

It's one thing when the government is a stakeholder in a company, as it is with Citigroup, Bank of America and American International Group. We, the taxpayers, are involuntary owners of these companies and have no interest in rewarding failure.

It's quite another when government has no ownership stake, where compensation is a matter for shareholders and boards of directors.

This level of government involvement may be business as usual for the European Union. In the United States, where the Federal Reserve is cooking up a plan of its own to insert regulators into the compensation process, it reads like fake news from the Daily Show.

The good news is, the Obama administration isn't wild about setting individual compensation. The bad news is, UK Prime Minister Gordon Brown is. He wants to set bonuses and sanction banks that don't comply.

Can a one-world pay scale be far behind? That way, no financial institution would be tempted to depart the homogeneous European Union for what used to be the more capitalist-friendly, entrepreneur-oriented climes of the United States. and the United Kingdom.

OK, bankers screwed up. What should we do about it? The answer isn't putting government bureaucrats on the compensation committee.

"Public companies should pay bonuses out of pretax profits," says Michael Aronstein, president of Marketfield Capital in New York.

No profits, no bonuses.

Another option is to "replicate the type of liability that existed with private partnerships," he says.

The firm loses money, the officers, directors and top earners lose money.

If history is any guide, regulation - or, in this case, regulators - will prove to be unworthy of the competition. Bankers will find a way to evade the rules and exploit the loopholes to their own advantage.

It seems like a lot of wasted energy when, with proper incentives, these clever rascals would put their considerable talents to better use: working on behalf of shareholders.