An official at the Bank of England has argued that banks should link the pay of senior executives to return on assets (ROA) instead of return on equity (ROE).
During the Wincott Annual Memorial Lecture in London on 24 October, Andy Haldane, the Bank of England’s executive director for financial stability, said that the near tenfold rise in bank executives’ pay since 1989 could have been restrained if it had been linked to the return made on assets.
He said: “In 1989, the chief executive officers (CEO) of the seven largest banks in the United States earned on average $2.8 million. That was almost 100 times the median US household income.
“By 2007, at the height of the boom, CEO compensation among the largest US banks had risen almost tenfold to $26 million. That was over 500 times the median US household income. Those are high returns by any measure.”
Haldane said that if the CEOs had, in 1989, agreed to index their salaries not to return on equities, but to return on assets, by 2007, their compensation would not have grown tenfold. Instead it would have risen from $2.8 million to $3.4 million.
He added: “Rather than rising to 500 times median US household income, it would have fallen to around 68 times.
“It would be a relatively small step for banks to switch from ROE to ROA targets in their capital planning and compensation. Yet the effects on risk-taking and remuneration could be large.”
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