The regulation of bankers’ remuneration : a comparative study between the UK and China

During the Global Financial Crisis, the bank failures that spread across major Western economies have exposed severe flaws in bankers’ remuneration. It has been extensively acknowledged that the excessive risk-taking in banks which resulted from inappropriate and distorted remuneration incentives significantly contributed to the catastrophe. As a consequence, bankers’ remuneration has become an essential issue of banking regulation. After the Crisis, banking regulators in many economies have been working on establishing a productive regulatory framework for bankers’ remuneration. Nevertheless, due to the diversities among different economies, the issues of bankers’ remuneration are divergent from each other, particularly between developed and emerging financial markets. In many developed economies, the problem was that the liberal market model of bankers’ remuneration ran out of control before the Crisis. Therefore, regulation is necessary for correcting market failures. In contrast, the problems in some emerging markets have lain in the difficulties to decouple from non-market forces, such as state control. Therefore, establishing a professional regulatory framework with reference to the modern experience of developed markets has been considered as a feasible way to push forward the marketisation and modernisation of bankers’ remuneration. This thesis aims for a comprehensive and analytical comparative study on the differences in bankers’ remuneration and its regulation between developed and emerging markets, as well as the institutional origins of these differences. For concreteness, the thesis illustrates the UK, a leading developed market and China, the fastest-growing emerging market to probe into their policies and practices of regulating bankers’ remuneration. The thesis finds out that the UK’s approach of regulating bankers’ remuneration is market-based while in China it is state-oriented. In the UK, the failure of bankers’ remuneration resulted from the defects in market operation. Nevertheless, the regulatory philosophy insists that liberal market should still be the primary mechanism to decide bankers’ remuneration while regulation is the supplementary mechanism to rectify market imperfections. In China, bankers’ remuneration has long been controlled by the government in an administrative and politicised approach. Despite some regulatory efforts to introduce modern and market-based remuneration methods, the regulators still tend to play a dominant and intrusive role in arranging bankers’ remuneration and incentives. By examining and comparing the financial institutional frameworks in the UK and China, the thesis proves that both approaches have been inherently embedded in the existing institutions, which have profoundly shaped the structure of interests among different parties in society and the ideology of interpreting the ‘market-state’ relationship. Therefore, the regulatory reform of bankers’ remuneration is subject to path dependence and should be expected as a long course of institutional change, through gradual and incremental improvements