In boom times, bank executives receive bonuses, not for performance but simply for sticking around. Now those executives are being blamed for a major recession and the workaday taxpayers, who’ve bailed out the floundering banks, are joining the rising call for a hard look at how — and how much — bank executives worldwide are paid. MERC Partners of Dublin shares the view from Ireland.

Executive compensation – particularly in the troubled banking sector – has never been under keener scrutiny. Public outrage, whether in Ireland, the UK, the US or elsewhere, at excessive pay packets in institutions reliant on the public purse is understandable. President Obama’s new administration has proposed a $500,000 ceiling on pay for organisations receiving further government support; in the UK, the government has thus far resisted the imposition of a rigid cap on bank executives’ bonuses, despite opposition leader David Cameron’s call for a £2,000 cap on the bonus of every employee in a bank in which the taxpayer owns a large stake.

Vote-catching cries of “off with their heads” are easy to make, yet the politicians must tread a fine line, so that some flexibility remains to be able to attract, retain and motivate an organisation’s best people. Bankers in the US have argued that stringent bonus restrictions will cause a brain drain from the industry, and could have the counter-productive effect of actually inflating cash salaries.

Jamie Dimon, CEO of JPMorgan Chase, stated recently that, “companies that need the most talented people to fix their problems won’t be able to pay them”. However, the banking sector has until now never been particularly sensitive to public opinion, and President Obama spoke for many on Main Street when he described outlandish executive pay as “not only in bad taste, it’s a bad strategy.” It should also be noted that the proposed $500,000 cap is approximately $100,000 more than Obama himself receives, and ten times the US median household income.

Nevertheless, Dimon’s argument is echoed in Europe. Josef Ackermann, CEO of Deutsche Bank, predicted in early February that the US pay restrictions could push the best US talent to defect to hedge funds or to overseas rivals: “talent will be happy to work for us. At the end of the day this is a people business; it is about who has the best talent.” Ackermann and his senior colleagues have themselves foregone bonuses for 2008, after the bank’s €3.9 billion loss, its largest in 50 years. Crucially, however, Deutsche Bank has not received government funds. Ackermann stated that Deutsche would emerge successfully from the crisis after cutting some of its riskiest businesses, including proprietary trading.

Yet there can be no doubting that, by the time we have all emerged on the other side of the global recession, executive remuneration structures and, importantly, expectations over reward are likely to be very different. Interestingly, a study by Watson Wyatt suggests that recognition of the need to change how performance is rewarded was actually becoming evident before the global financial collapse. The suggestion that, particularly in the US, CEOs milked the system in the run-up to the collapse, and that there was endemic rewarding of poor performance, may be too simplistic. According to Ira Kay, Global Director of Executive Compensation Consulting at Watson Wyatt, “the legislative bailout package and the ongoing financial crisis, coupled with continued pressure from shareholders, the media and executive pay critics, are leading compensation committees to make their executive pay programmes more shareholder-friendly.” According to Kay, before the crisis, “many were heading down that path already, by factoring in recent financial performance when establishing pay opportunity levels for their CEOs.”

The scale of the challenge facing boardrooms in maintaining executive reward at a level that will continue to attract and retain top talent (without the figures simply turning into an annual feeding frenzy for the media and other critics) are underlined by several research studies. Research by the Institute for Policy Studies in 2007 revealed that the CEOs of the 500 largest US companies took home an average of $10.8 million in total compensation the year before. This equates to 364 times that of the average American worker (who earned $29,544 in the same period), and led inevitably to critical headlines pointing out that the average CEO earned roughly as much in a day as most people made in a year. In the UK, the remuneration research organisation Incomes Data Services has identified a widening gap between executive compensation and that of other workers. Between 2000 and 2008, the earnings for FTSE-100 CEOs rose by 167%, and by 147% for FTSE-250 bosses. By contrast, the average national pay rise over the same period for the UK’s 28 million workers was just 32.2%.

With a few high-profile exceptions, this disparity was simply not a contentious issue when times were good. Now, everything has changed, and companies must find appropriate structures at a time when long-term planning and target-setting is particularly difficult.

The question of what constitutes an appropriate rate of pay for a CEO has been debated over the years and is sure to be revisited. There is no magic formula, but the argument can be expected to centre on avoiding an exclusive focus on short-term, bottom-line results. Management doyen Peter Drucker has argued that CEO salaries ought to be no more than 20 times the salary of the most junior worker, which, as a concept, would certainly heighten teamwork and a sense of “all being in this together”.

While the excess of some senior bankers is currently an easy target, it should not be overlooked that domestic and international politicians boasted for years until 2008 about the financial sector, often leading the calls for further deregulation. Things undeniably went too far with excessive and guaranteed bonuses, but public discussion on the topic of CEO remuneration should not become indiscriminate. We are in unchartered territory, and the manner in which key executives are kept challenged and motivated will be a critical factor influencing how – or even if – companies manage to deal with the economic downturn.