Irish memories of the financial crisis and the subsequent €67.5bn rescue programme from the IMF and EU are still fresh, even over a decade later. That is to be expected, given the outsize consequences of the crisis on Ireland’s economy and the everyday lives of its citizens.
It makes it easy to understand the popularity of Ireland’s €500,000 cap on fixed pay for bankers at lenders that received a taxpayer bailout, in parallel with a complete ban on bonuses. The measures place Ireland’s regime among the toughest in the world on curbs on banker pay, going beyond the EU’s bonus cap, which limits awards to twice fixed salary.
But, as the latest senior exit from Bank of Ireland shows, the cap and ban are blunt tools that have outlived their usefulness and now risk doing more harm than good. They apply to the three lenders with government stakes — BoI, Allied Irish Banks and the smaller Permanent TSB — which dominate the domestic market. Other financial institutions are not bound by them, let alone technology companies wooed by the promise (until recently) of a tax-friendly base in Ireland.
Headhunters and bankers complain that the measures disincentivise joining and instead exacerbate attrition, from the very top through to tellers. That is a problem when Irish lenders are competing, for customers and for talent, with fintech companies and international banks, which after Brexit have swapped London for Dublin.
In reality, the cap only really affects a handful of executives. And some have found workarounds, including BoI’s chief executive, Francesca McDonagh, who negotiated with the finance ministry for a €950,000 salary. Her predecessor kept his salary of over €600,000 even after the cap’s introduction.
More consequential is the bonus ban. Most unfairly, it also extends to healthcare and childcare, and applies to all 22,000 rank-and-file employees of the bailed-out banks. That is hard to justify. The disparity was heightened by the pandemic, with other financial firms able to dispense childcare vouchers to employees.
Politicians privately nod to the need for reform. But banker pay is simply not a vote-winner in a country battered first by the financial crisis and now by the pandemic. The delicately composed majority coalition government has half an eye to the 2025 elections. Sinn Féin, the leftwing nationalists currently enjoying success in polls (but thought unlikely to find a coalition partner), are even more hardline when it comes to banker salaries.
However, politicians need to make the case for the long-term prosperity of Ireland’s banking sector. That need not mean a return to the excessive risk-taking seen before 2008: even if Ireland were to jettison its bonus ban, it would still be subject to the EU cap on variable pay. Ireland’s banks are also now better placed to withstand loan losses some fear: their ratio of the safest kind of capital stood at 18.8 per cent at the end of 2020, compared to a European average of 15.6 per cent.
The pay cap’s proponents argue that bosses of what are essentially utility banks in a government-backed duopoly do not deserve large salaries. Perhaps not. But that should be a decision made by boards, not the state. It is particularly egregious in the case of BoI, where the state shareholding is now only 12 per cent (the government remains the majority shareholder in AIB) and is set to reduce further.
The pathway the government has set out to shed that stake made the case for banking without state support. It is now also time to cut the strings that come attached to that support.