Well, that's an inflammatory title, isn't it? I'll probably get lots of abusive remarks, and lots of people won't even bother to read this post because of the title. But I really feel that someone needs to set the record straight, because there is an AWFUL lot of rubbish being spouted about bankers' bonuses at the moment.
The first thing to note is that banks pay bonuses to three different groups of people. From the headlines you would think that only senior bank executives receive bonuses. But two other groups also receive bonus payments:
- ordinary bank staff.
Let's look at the bonuses paid to these three different groups of people.
1. Senior executives.
These are the headline-grabbing figures. Bob Diamond (CEO of Barclays) awarded bonus of about £9m. Stephen Hester (RBS) paid a bonus of £2.04m. Eric Daniels, outgoing CEO of Lloyds, received £1.45m. Doesn't it make you see red?
From the headlines you would think that these people are being paid this amount of cash, wouldn't you? Well, you would be wrong. The cash amount paid in these bonuses is tiny. The vast majority of the bonus is paid in shares in the company. In fact new EU rules enforce payment of bank executive bonuses almost entirely in equity shares.
The intention behind paying senior executives in equity is to tie their remuneration to the performance of the company. The company does well, their shares increase in value. The company does badly, their shares decline in value. This is called performance-related pay (I shall return to this subject later on). The idea is that if the value of their own pay package is partially determined by the success of the company they will want to make sure that the company they lead does well. Surely this is a good idea? It is also the standard pay formula for senior execs of large and medium-sized corporations in all industries. Why should banks be any different?
Now, we can discuss whether or not equity incentives actually work in practice, and whether the remainder of the average pay package for senior bank executives - salary and pension contributions resembling telephone numbers - is sufficiently ginormous to eclipse the equity incentives and render performance-related pay ineffective. This is a far more sensible debate. The Hutton Report on local authority pay has looked at pay caps and other measures to keep senior executives pay at least on the same planet as that of their staff. Obviously this report is written with the public sector in mind, but its findings are relevant here too - particularly as banking is so critical to our economy that it can almost be regarded as a public service.
To my mind, if you want to make bank execs more responsible and accountable, you might want to reduce their base pay so that the performance incentives in the bonuses can be really effective. Pay them less just for being there, and make them earn the rest of their remuneration through company success. So let's have MORE bonus payments to senior bank executives, not less.
Oh and by the way - if anyone thinks that loss-making banks shouldn't be paying their senior executives bonuses, consider this. Corporation tax law allows companies (including banks) that make a loss to carry that loss forward for up to five years and use it to reduce tax payments during that period. Because of this, Barclays paid almost no corporation tax on profits of £4.9bn in 2009, Lloyds is paying no corporation tax on profits of £2.2bn in 2010, and RBS won't pay any corporation tax either for a while even when it gets back into the black (it's still making losses at the moment). However, senior executives pay tax currently at 50% on the cash portion of their bonuses and on share dividend payments. If they sell the shares they incur capital gains tax at the top rate. So effectively loss-making banks pay more in tax if they DO pay bonuses than if they don't. We would be nuts to stop them.
Traders are the people who buy and sell (or lend and borrow) things financial on the world markets. They are just what their name suggests - market traders. These days trading is done by telephone and on computers. But until quite recently some financial markets (LIFFE, for example) operated by "open outcry" - yelling trades across a roomful of people all doing the same thing. Just like Walford market.
Traders, therefore, are SALESMEN. And like all salesmen, they are motivated by money. The more they sell, the more they get.
ALL sales forces, in all industries, are paid on results. Typically a salesman's pay package will be made up of basic + commission on trades. Successful salesmen are then usually also paid yearly bonuses relating to the value they have generated for the company as a whole - i.e. performance-related pay (again). Because salesmen are motivated by money and generally have a pretty short-term view, it's not usually appropriate to pay them in company shares (although senior ones, who have management responsibilities, may be rewarded in this way). They need cash - it's the only thing they understand.
Now, we can discuss whether traders being allowed to generate huge amounts of money from reselling derivative products to each other at ever more inflated prices is a good thing. Personally I think it's daft. But I can't criticise them for doing it. If they can sell something and make loadsamoney from it they will. Controlling their activities is the responsibility of bank management and external regulators. And the fact is that they did - and do - generate huge amounts of income for banks. They deserve to be rewarded for this just as successful salesforces in other industries are. So there is NO justification for restricting cash bonuses to bank traders. The EU attempted to do this and the banks - rightly in my view - refused to cooperate.
3. Bank staff
I've worked for a number of banks, mostly as an independent consultant. But I was an employee of Midland Bank (subsequently HSBC), SBC Warburg (now UBS), and Charities Aid Foundation (CAF) - which is also a bank (not many people know that!). I've never been a trader, and I've never been a senior executive. But in every bank where I was an employee, I received a yearly bonus. This was my share of the profits generated by the bank, and it was related to my performance as an employee. If I did a good job, I got more: if I was less effective I got less (and if I was dreadful I got nothing, of course...). The yearly appraisal didn't just affect my future pay (as in pay rises and promotion), it determined my bonus amount for the CURRENT year. Staff bonuses can typically be taken as cash, shares or increased pension contributions - or given to charity - or a mixture of all of these.
The vast majority of bank staff, even in the City, are not particularly well paid, although they do get good benefits packages. Branch-based frontline and admin staff currently earn £14-17K on average. Credit controllers and similar junior management personnel earn £20-25K. Junior back office staff in the City earn £15-17K. Even branch managers - the traditional "bank managers" - only earn £28-50K depending on the size and location of the branch they run (figures from Hays Banking Personnel) So the yearly bonus is a welcome addition to their pay packets. And it means that the staff benefit directly from their company doing well. Does anyone really have a problem with a bank cashier receiving a small amount of money (believe me, it isn't much) once a year in addition to her (most bank cashiers are women) meagre salary?
Giving staff yearly performance-related profit-share bonuses is widely recognised as good remuneration practice across all industries. I would HATE to see banks stopped from doing this because of concerns about their profitability, tax contribution and past behaviour.
Now, we can have a discussion about whether banks should be continuing to operate in the way that generated their huge profits in recent years, given that some of their activities were so high risk that they weren't sustainable and therefore caused the current financial crisis. Some of them also were perhaps morally and even legally dodgy. But that isn't the fault of bank staff. Why should they lose their bonuses because people who don't work for banks want banks to pay loadsamoney to the government - which is at least partly responsible itself for the collapse of the financial system? There is NO justification for extra tax charges to banks that result in ordinary bank staff losing bonuses and maybe even having their pay restricted.
So, to summarise - get off the banks' backs and stop moaning about bonuses. There are far more important things to worry about that. Like bank regulation, for example - or lack of it. Oh, wait, though - that's to do with the government, isn't it? oops.....