News that Mark Carney will receive total annual compensation of £890,000 ($1.4-million a year), including a pricey housing allowance, to head the Bank of England, has put a few pairs of knickers in knots across the pond. Not only will Mr. Carney receive thrice the amount that his predecessor Sir Mervyn King is paid and more than double his own current salary as Governor of the Bank of Canada, he will out-earn European Central Bank president Mario Draghi and lap by several times the pay of U.S. Federal Reserve chairman Ben Bernanke. But the outrage shouldn't be that Mr. Carney will be paid too much; the real problem is that his peers are paid so little by comparison.
Regulators in general, and financial regulators in particular, go about their jobs surrounded by temptation. While many earn decent, even high, salaries compared to average wage earners, they take home a pittance compared to the people they regulate. As a result, the temptation to jump to the other side is great. Witness last year's departure by Mark White, a top official with Canada's banking and insurance regulator, the Office of the Superintendent of Financial Institutions, for a senior job with Bank of Montreal. Mr. White earned in excess of $235,800 at OSFI, but you can bet BMO offered a significant increase.
That is not to suggest Mr. White did anything wrong; indeed, OSFI took steps to prevent any conflicts of interest. But consider Japan, where the risk of tainted career-minded regulators is very real. In Japan, senior bureaucrats routinely leave the public service to take on high-paying jobs with the private-sector companies they have overseen. The practice, known as amakudari (descent from heaven) has led to a string of scandals in which bureaucrats were accused of showing preferential treatment to future employers. It has also made the country resistant to needed structural changes, despite repeated, unfulfilled promises by politicians to clean up the practice.
Back in Canada, OSFI head Julie Dickson hinted at the challenge of underpaid regulators in a speech last year, saying, "Supervisors would not tolerate banks operating businesses without the right people, and we cannot accept situations where supervisory agencies themselves do not have the resources they need to oversee such activities efficiently."
She is absolutely right. Financial regulators hold important jobs – they are guardians of systems that keep the world economy functioning. Although, as public servants, they should presumably be motivated by more than just money, banking regulators should be paid enough to attract the best people to the jobs, enshrine their independence and vanquish any sense that they are making a financial sacrifice.
Of course, that wouldn't play well to those in the cheap seats, and undoubtedly lead countless other senior public servants to argue for loftier pay packages. But it would send an important message that governments are truly interested in doing what is necessary to keep their regulators strong and credible.
Sean Silcoff