Should bankers' salaries be capped? An ex-Citi exec answers

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Should bankers' salaries be capped? An ex-Citi exec answers

In the US, there was a demand for a cap on financial sector salaries especially after the government came and bailed out banks. Commenting on that, Victor said, the salaries in the banking industry were always under discussion.

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Victor J Menezes, retired as Senior Vice Chairman of Citigroup. Before that, he was Chairman and CEO of Citibank. Victor is now a Senior Advisor to New Silk Route Partners, a private equity firm founded by Rajat Gupta of McKinsey and Parag Saxena.

In the US, there was a demand for a cap on financial sector salaries especially after the government bailed out banks during the financial crisis.

Menezes, who was had an insider's view of the financial machinery, discusses the issue on the Forbes India show on CNBC-TV18.

Here is a verbatim transcript of the exclusive interview with Victor J Menezes on CNBC-TV18. Also see the accompanying video.

Q: It started in the US where there was a demand for a cap on financial sector salaries especially after the government bailed out banks. In India, we now have ministers saying that CEOs salaries should not be vulgar - of course, they haven't defined what vulgar is. What is your view? Should there be a cap or would it drive away talent?

A: I'll tell you a story. I once had a visitor from New York when I was running Citibank India. We took him to see [then] Prime Minister Morarji Desai. We had primed him all about the economy and questions to ask and so on and we went in to the Prime Minister's office and sat down and shook hands, and we were about to start talking about the economy.

The Prime Minister looked at me and said, the problem with you as we were is that you pay your drivers too much, I didn't know that, but thank you very much.

So, salaries in the banking industry are always under discussion. I think the issue is not absolute levels in my view. The issue is how they are related to performance and how is performance derived and based. If you look at performance on a balanced basis, taking into account the risks and the write-offs, you'd get at a good salary structure.

What has happened is: salary structures have been driven by comparisons and competitive positions amongst various banks and they are drifted upwards regardless of underlying performance. So, there is a natural debate going on right now about salaries and how high they should be. That is a legitimate debate. But at the end of the day, I think the market will settle for what it should be. I don't believe that salaries necessarily cause the problem.

Q: But just sticking with the banking salaries, do you think that bonuses have been encouraging risk in the last four or five years. Do you think that they could have been any way contributed to the crisis that we had in 2008?

A: Bonuses that were based on revenue or short-term indicators in the absence of risk measurements are dangerous regardless of what period of time. So, the bonus programme has to be based on a balanced view of performance.

Q: How do you feel as a former banker and senior banker that this whole - if I may use the word - revulsion against bankers, do you think it is justified? Or you think it is just one of the things that have gone out of hand?

A: It goes with the territory. There is no question that the banking industry has cost the public exchequer in many markets significant sums of money. That does cause the taxpayer to feel very upset about it. That is right. However, that right through the centuries bankers are either too stingy and greedy for not lending money or crazy for lending too much money, so getting that balance right is always difficult. So, it is not a position that is terribly popular at the best of times.

Q: So, it is just part of the game?

A: It is part of the game.

Q: The other big bad word was derivatives. In your opinion, especially as you have been a CFO of a large bank, with Citigroup, how dangerous have derivatives been and were they just misused? Should they be regulated, can they be regulated or do you think that we need a counterparty risk - I mean a kind of exchange for derivatives. Will that work at all?

A: I think derivatives are not bad, per se. They certainly perform a very useful economic function. There is a lot to be done by way of disclosure and certainly by way of creating a clearing house to manage it. If you want to look at the underlying problem, it is just old-fashioned leverage that has caused most of the problems. It is not the new fangled products. Most of the new fangled products were just disguising leverage. At the end of the day, if you look through any financial crisis over the last 300 years, it is people have found a way to increase leverage beyond what people expected it, that has been the root cause.

So, people talk about banker salaries, they talk about derivatives, they talk about new fangled products. But at the end of the day, it is the old-fashioned leverage. How much capital do you have vis-à-vis the debt?

Q: In a sense derivatives have made it easier for four people who wanted to go over-leverage to being able to do it without really letting the controllers know even within banks?

A: Possibly yes. The information is there. So, it was not that it was hidden under a rock.