2 - The Pre-GFC Practice of Bankers’ Remuneration in the UK

Summary

This chapter investigates the pre-GFC practice of bankers’ remuneration in the UK to discover how bankers’ remuneration affected the sustainability of banks. It starts with an overview of executive remuneration in Anglo-American corporate governance, focusing on its role as both a solution to the agency problem and a mechanism for shareholder interest maximisation. This chapter then examines the practice of bankers’ remuneration in the ‘Big Four’ banks of the UK from 2000 to 2007. It is found that performance-based remuneration, which was aimed at aligning bankers’ wealth with shareholder interest, was the primary remuneration component. Stock options and restricted shares were widely used as performance-based remuneration, and financial indicators oriented by short-term profit and shareholder return were the primary metrics of bankers’ performance. As a result, bankers were incentivised to take excessive risks, which eventually contributed to the vulnerability of banks and their failures.