ABSTRACT
The financial crisis in late 2008 witnessed the end of the housing boom and closedown of the credit markets in many parts of the world as well as the downfall of many financial services titans such as Lehman Brothers and Bear Stearns in the US and the Royal Bank of Scotland (RBS) and Halifax Bank of Scotland (HBOS) in the UK. Commentators of the crisis have analysed the different aspects of this watershed event. One aspect that has attracted public attention is that banks, in their relentless pursuit of profitability, seemed to have neglected the social roles that they were supposed to play (Jenkins 2010). Many governments across the world had to resort to taxpayers’ money to rescue their respective banking systems. The moral hazard problems resulting from such bank bailouts are explored elsewhere in this volume. In this chapter, we are concerned with the ethical dimension of executive compensation, particularly those in the financial services. Executive incentive packages have caused significant public outcry, not only because the substantial amount of remuneration staggers people who are unfamiliar with the payout practice of this sector but also because executive compensation in the financial industry was perceived to be conducive to banks (especially those of retail) taking excessive risk, the consequence of which could have led to the financial crisis. Indeed, this view was shared among the members of G20 when they jointly announced that ‘excessive compensation in the financial sector has both reflected and encouraged excessive risk taking’ (Leaders’ statement: The Pittsburgh Summit 2009). The Financial Services Authority (FSA) in the UK has also listed remuneration structures as one of the possible driving forces behind excessive risk taking when it claims that it would appear that in many cases the remuneration structures of firms may have been inconsistent with sound risk management. It is possible that they frequently gave incentives to staff to pursue risky policies, undermining the impact of systems designed to control risk, to the detriment of shareholders and other stakeholders, including depositors, creditors and ultimately taxpayers.1
