Normally, when people propose stricter limits on bank-executive pay, a principal objection is that it would cause a talent flight to other financial centers around the globe. Aside from the fact that these arguments overstate both the value of this "talent" and the ability of people to pick up and leave, now we really don't have to pay attention to this sort of claim: The European Union has imposed strict rules that connect banker pay with risk and prudential regulation. While the headline of this story refers to a "cap," this isn't a limit on compensation; it's just a limit on the amount of compensation an executive can take home in cash rather than stocks. If the bank doesn't follow these practices, it will be forced to carry more capital to protect against losses -- which has the effect of lowering the bank's profit.
This mechanism is very similar to the rules being promulgated by the Federal Reserve here in the United States, but those rules, thus far, are proposals lacking actual enforcement. But now that the EU has taken the lead, it's not likely that tons of American bankers will head to Hong Kong if the U.S. follows suit. It's time for regulators to demonstrate that their discretion can have some actual effect on the financial sector.
In related news, did you know that the CEOs of major Japanese companies are paid remarkably less than their American counterparts? And yet they seem to have some pretty successful businesses over there.
-- Tim Fernholz
