Release Date 21 December 2011

Bankers' bonuses are not to blame for the poor decisions that caused the global financial crisis, new research has found.

Dr Sarah Jewell, an economist from the University of Reading's School of Politics, Economics and International Relations, has co-authored a paper countering claims that large bonuses in the banking industry are at the root of the global financial crisis.

The paper was published as the Government this week (Monday 19 December) accepted much of the proposals contained in the Vickers report into the reform of the banking system in the UK.

The researchers' study of executive pay found that although remuneration in the financial services sector is high, compared to other industries there is no evidence to support the argument that inappropriate incentive structures led banking executives to take excessive risks for short-term profits.

The suggested dependence of bonus payments on short-term corporate performance has led to the notion that bankers were over-incentivised to take risks, and was named as a factor behind the crisis in the Turner Report, commissioned by the government to make recommendations for regulatory reform in the banking industry.

To investigate this claim, researchers correlated directors' pay in any year with the share price performance of the company in the same year, to see what the relationship was between pay and performance. They concluded that it was weak.

The research showed a stronger link between executive pay and firm size, implying that executives may be incentivised to ‘grow' their company either by internal organic growth or acquisitions.

Dr Jewell said: "It is perceived that bankers' bonuses were to blame for the financial crisis, but our research has found that there is no evidence to show the relationship of pay and peformance of senior directors of banks were out of step with other sectors.

"Bankers' salaries are high, but our research found that directors were being paid high salaries irrespective of short-term share price performance. We found stronger links between executive pay and company size, suggesting directors had more personal incentives to grow their businesses than achieve short-term profits"

The research was carried out with Professor Ian Tonks and Professor Paul Gregg from the University of Bath. Their research has been submitted to the government's consultation on executive remuneration.

Professor Tonks, from the University of Bath's School of Management, said: "Following the crisis, a number of official reports have placed a lot of emphasis on curbing incentives, but in fact there is no evidence that incentive structures in banking were out of step with other sectors.

"I should emphasise that we are not trying to defend bankers' pay; our argument is simply that any poor decisions made by bankers that led to the financial crisis were not made because of their incentive payment structures."

ENDS

For more details please contact the University of Reading pres office: Pete Castle on 01189 378 7391 or p.castle@reading.ac.uk or James Barr on 01189 378 7115 or j.w.barr@reading.ac.uk

Notes to editors

Executive Pay and Performance: Did Bankers' Bonuses Cause the Crisis? Professor Paul Gregg, University of Bath (formerly Bristol), Sarah Jewell, University of Reading, and Professor Ian Tonks, University of Bath; International Review of Finance, forthcoming 2011. DOI: 10.1111/j.1468-2443.2011.01136.x

View the paper at: http://www.bath.ac.uk/management/research/pdf/2011-01.pdf