Some argue that we need to limit how much bank executives are paid. While doing so may be emotionally satisfying, the reality is that how much bankers get paid, doesn’t matter…as much, as tying what they get paid to the quality of the loans they make.
We are focusing on the wrong question when we focus on how much bankers get paid. The problem isn’t how much bankers are paid; the problem is the basis on which they are paid. The problem is that today bank pay is based on the quantity of loans they make, not quality of the loans. Add to this that they are making loans with other people’s money, your money, the hard- earned money you deposit at banks, and it becomes clear that very little will change and we will continue to be at risk of experiencing future financial crises and bank bailouts until bank executives are paid based on loan quality, not quantity. So, what specifically needs to change?
1st, Base bank pay on how many loans are repaid in full: The more loans that are repaid, the more bankers get paid. It is time to tie bank pay to loan repayments.
2nd, Bankers’ bonuses are received after loans are paid back. Today, they make the loans and get their bonuses before the loans are repaid. Currently they are getting paid based on loan quantity, not loan performance.
Only when bank pay is tied to the amount of loans repaid in full, and after loans are repaid, will we have a real chance to reduce the bad loans that cause financial crises.
Remember, while restricting banker compensation may be emotionally satisfying, it is not as effective as tying how much they make to the quality of the loans they make.
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