Merit Pay for Central Bankers?

If only government employees received performance-based salaries.

So let's get this straight: The finance ministers and central bankers of the G-20 sat down in London this weekend and came away with a set of "further steps to strengthen the financial system." Among these steps is an accord on "global standards on pay structure . . . to ensure compensation policies are aligned with long-term value creation and financial stability."

There's no arguing with those goals, but one could ask some questions about the source. We can think of few large employers anywhere that do less to ensure that pay is tied to value creation than government bureaucracies. OK, we can't think of any. And it's hard to imagine any measures more likely to damage economic performance and "value creation" than putting the government in charge of what private employees get paid.

In the public sector, performance is often difficult or politically impossible to measure (never mind encourage or enforce), seniority rules, and even the hint of job cuts or attrition is met with outrage by public-sector unions that have mastered the art of holding the public purse hostage to their special interests.

No one is proposing to pay bankers like social security clerks or school teachers. But count us skeptical that a political class that can't see its way to pay for performance in its own backyard will get the incentives right when dictating pay policies for others. Maybe if central bankers and finance ministers could figure out how to tie their own pay to "value creation and financial stability," the idea would deserve another look. Banks may not get all the incentives right, but at least their contracts reflect the pressures of a competitive market, rather than the politicians' universal mandate to find someone, other than themselves, to blame for a financial panic.