Preventing the Next Financial Crisis? Regulating Bankers’ Pay in Europe

This article offers a critical appraisal of the way in which executive pay in financial institutions is regulated in the European Union. Despite the widely acknowledged role of executive pay in causing the financial crisis, regulators and policy makers were reluctant to intervene because of the ideology of shareholder primacy and an unjustified belief that this was a matter for companies and their shareholders alone. As a result, the original regulatory scheme which was introduced was very weak. The European Parliament responded to these developments by capping executive pay. The article argues that, while this cap is a crude instrument, it can be justified on economic grounds because it considerably reduces the likelihood of a future financial crisis, with all the social costs that would entail. If it also results in much higher fixed pay, that is a matter of concern for shareholders alone, and might even force them into the activism so long expected of them.