The recent loss of £1.5 billion at UBS as a result of allegedly unauthorised trading raises the question as to the possible causes of this failure. Is this attributable to wrong pay incentives, failure of supervision and internal control, or corporate culture?

Dr Gilad Livne, Senior Lecturer in Accounting and Finance, explains further based on his latest research.

We remember very well that the sub-prime banking crisis has attracted a close scrutiny of pay structures at banks. This is much more easily quantifiable than controls and culture. Moreover, the remuneration practices of chief executives invite controversy. Have they contributed to the colossal losses inflicted on economies around the globe? Bank CEOs have been rewarded handsomely, and this generous treatment continued even through the global financial crisis - as the value of bank shares collapsed and the industry turned to the public sector for massive financial support of more than $10 trillion dollars worldwide.

It is true that many bank bosses have been penalised, especially the ones who lost their jobs as a result of the crisis. And, because much of the payment to chief executives is in the form of equity and equity options, bank bosses nowadays are not quite as well remunerated as they used to be. Still, the high levels of remuneration in the industry do sound rather like payment for failure. A recent study by the Institute of International Finance has found a greater use of guaranteed bonus (The FT, 21 October 2011), a practise that fails to link pay to performance.

To what extent does UBS and the sub-prime crisis "prove" the contention that bankers' remuneration, rather than, say, weak internal controls, has been encouraging excessive short-termism and risk-taking? One argument has been that 'mark-to-market,' or fair value accounting, has helped bankers to mask high levels of unwarranted risk accumulation. Under fair value accounting, bonuses are paid for with profit that has not yet materialised leaving banks exposed in the event of accounting profits turning into losses.