Navigating the Business Landscape

Cultural Divergence in Executive Salaries in the Financial Sector
Written by Ignacio Bao, President of Signium Spain and Portugal, and Chairman of Signium International

One of the consequences of the recent, and not yet surpassed, financial recession is that the the debate on limiting executives’ salaries in the financial sector has transcended the general public and has taken hold of politicians in countries around the world.  This debate has not only been opened on a national basis, as is the case in Spain, but is also being made one of the points on the agenda during Spain’s presidency of the European Union.

First of all I would like to emphasize that the current crisis is largely the result of a complex financial system capable of developing products difficult to understand and, in most cases, difficult to predict the effects they can provoke when markets go against the very same predicted trends that allow for their development.

For this reason, in order to avoid a similar repeat performance of financial meltdown, it is necessary that Financial Institutions are able to analyze in depth the products they recommend, and to that end the professionals within the Control, Risk and Auditing Departments need to be qualified in these tasks, thus able to generate confidence and trust in the products and services offered by their institutions.
    
If this auto-regulation were to prove impossible, as seems to be the lesson to be learned from the current economic situation, the external supervision of Financial Institutions becomes more essential than ever – an initiative on the part of both private institutions and auditing firms, as well as on the part of the public administration by creating or improving the already existent state, federal, or supranational  supervisory organisms.  We should not forget that the Rating Agencies’ recommendations hours before the meltdown were completely contrary to reality of the financial institutions followed and supervised by these very same agencies.

May that be, the previous explanations have only tiptoed around the various debates that have resulted from the most recent economic crisis, and much of the blame seems to be focused on the salaries received by executives in the financial sector.

In relation to this matter, it should be clarified that fixed salaries have become rather standardized around the world, and with the exception of exchange rates, these salaries are very similar between the various international financial markets.  The significant discrepancies in total salary lies in the variable that these executives receive as a result reaching the individual, departmental or company objectives marked.  In the case of Spanish banks in Madrid for example, this variable salary is generally one to three times the fixed salary of the executive, although there do exist a few specific examples of individuals who earn a higher variable.  However, in the case of executives that work for internatonal foreign banks in markets such as London, New York or Hong Kong, this variable salary often is without limits and can reach up to 120 times the fixed salary of the executive in question.

The first cause of this startling discrepancy lies in the different volumes of transactions managed by the various financial markets, resulting in higher variable salaries in those markets in which a higher volume of financial operations are handled.  Regardless of this initial explanation there are cultural differences that influence this disparity.

This cultural divergence means that Spanish Banks, for example, tend to reward teamwork and collective objectives, putting more emphasis on the capabilities and performance of the company structure as a whole (or as a team, department, business unit, etc.) when analyzing results and objectives, rather than rewarding individual short-term performance and objectives.

As one can see, the differences in salary levels can be significant and in a free market, the best professionals will migrate towards those institutions and markets that best remunerate their services, thus making the limitation of salaries inconsistently across markets an unviable solution long-term that would only further distance salary levels from one another.  The likely result would be an adverse effect on those institutions that do decide to limit, or are required by legislation to limit, drawing the best professional talent away from those regulated entities and thus worsening their position globally and quite possible promoting instabilities in the financial system.

All this leads back to the initial argument of this editorial – adequate supervision that better controls and restricts high risk financial products from dominating the financial system, would limit the ability of entities to brokerage such products and thus help to reduce the non-recurring benefit of those financial institutions that would offer such products.  By creating a self-correcting market model that restricts these high-risk products, the variable salaries between markets should stabilize and better adapt to the supply and demand of professional talent and not the cultural or individual acceptance or aversion to risk of certain high-risk financial products.  •