Capped Performance

The government of India is planning to put a cap on maximum remuneration paid to Investment bankers / Heads of Stock exchange / clearing houses in India to avoid unhealthy competition and in turn avoid a catastrophic event like wall street collapse in India (Source: Economic Times, 09^th March, 2009 - http://economictimes.indiatimes.com/News/Economy/Policy/Govt-may-leash-pay-of-financial-top-dogs/articleshow/4243664.cms)

This move is based on the premise that Wall Street collapse was a result of mindless risk taking for earning more profits / bonus by Investment bankers, which is true to some extent, but not entirely. I think the failure at Wall Street bankers was a failure of the regulatory mechanism in US economy. The salary structure is the reward for performance, if you allow loop-holes in the system; even a low paid employee will try to use it to his advantage.

The government should understand that India was saved from this peril not because of the lower salary structure in Indian banking sector, but because of the stringent control imposed by RBI on Indian banks. Indian banking industry is already plagued by non-performers, who hardly take initiatives, and regulatory guidelines are mostly a garb for their ineffectiveness. Added to this if government decides to cap their salary, it will definitely result into a capped performance by all. I fail to understand why the government of land always try to tighten the noose around private sector, is it the inherent fear of losing control or the lust of having all power or just the legacy of pre-90s era which is difficult to root out.

Its not that Indian financial sector has not seen its failures, despite having the low salary structure. The Harshad Mehta and Ketan Parekh scams and the more recent Satyam fiasco has nothing to do with the salary structure of individuals, but was a failure of system and procedures.

The need of hour is to learn from Wall Street failure and plug the holes in system so that such failures can be avoided in future. Infact the government shall be giving more salary / incentives to the controlling agencies (Stock exchange, SEBI, Clearing corporations etc) to match their counterparts in banking sector. This will ensure that the best brains of our country are attracted to these areas and evolve the policies / process which are futuristic and provide the correct balance of control to the financial system.