Bank manager earnings are still a cause for controversy. Reaction to the criticism gets ever louder, as the example from UBS Chief Executive Sergio Ermotti shows. This is unnecessary finews.ch thinks. 

The bonus season is approaching and the issue of higher manager bonuses is again making waves. This was evident at a recent event in London organized by the British «Financial Times» newspaper. A figure no less than Sir Paul Tucker, President of the Systemic Risk Council and former vice-president of the Bank of England, took issue over this with UBS head Sergio Ermotti.

UBS profits from too-big-to-fail

Tucker’s criticism: In the good times UBS profits. In the bad times the Swiss tax payers come to the rescue. As happened during the financial crisis, when it incurred huge losses through speculating on the U.S. real estate markets, and was bailed out by the state, as reported by the «Financial Times» (Article firewalled).

And Tucker adds: Were bankers to earn less then this would help cover capital costs – and given the declining return on equity margins, this is badly needed.

Banks in the spotlight

Ermotti had a prickly reaction to the criticisms. «What are you talking about?» he asked Tucker and accused him of populism and envy. «I think this issue is taken up by people who aren’t happy with their own pay», said Ermotti, who earned some 13.7 million Swiss francs in 2016.

Ermotti complained that it is only bankers who have to defend their earnings in public. The classic argument from Ermotti is that pay is only so high to prevent talented staff moving to other industries.

The 57-year old Ticino asked Tucker to «stick to the facts». After all the UBS rescue package has delivered Swiss tax payers a profit of 6.2 billion francs. So one can’t claim that the banks are benefiting from the tax payer.

High risk, no taxes

Ermottis argument however is somewhat short-sighted. He fails to mention that Swiss taxes were the guarantor for UBS’s continued existence. The risk for the Swiss government was thus high, and the deal could have had negative consequences for the tax payer.

In addition UBS, due to the horrendous losses incurred by penalties for illegal business practices, paid no taxes for seven years after its bail-out, while at the same time manager earnings kept rising.

UBS posted losses for three consecutive years after the financial crisis. The accumulated losses reached around 30 billion francs, which it booked in different units. And like many other institutions, the largest Swiss bank also used the losses to reduce its own tax liabilities.

In the devils kitchen

The argument that higher salaries in the banking sector are justified in trying to retain staff are outdated and unsustainable. If bankers go where earnings are highest then this simply causes a pay spiral.

In the current economic environment, with low interest rates and declining margins, this leaves financial institutions in a no-win situation. Furthermore this simply widens the earnings gap between the average bank employee and the upper echelon. Bonuses for lower-level employees have been steadily eroded, while those at the higher level have continued to grow, leading to ongoing frustration and discontent in the Swiss financial center.