Here’s Lib Dem chief secretary to the treasury Danny Alexander interviewed on Sunday lunchtime, defending the Coalition’s decision not to demand RBS chief executive Stephen Hester return his controversial bonus — a few hours before Mr Hester voluntarily forfeited it to defuse the row:
(Available on the BBC website here.)
* Stephen was Editor (and Co-Editor) of Liberal Democrat Voice from 2007 to 2015, and writes at The Collected Stephen Tall.
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12 Comments
£8 million bonus.
Plus a salary of a million, plus the bonus of a million he turned down.
And that’s half of what he got last year?
So last year he got his million salary and twice the bonus of £8 million plus the bonus of £1 million
Total income last year £19 million?
Wow, he is rather well paid, isn’t he?
Not sure those figures are right – though I wouldn’t dispute your latter point.
However – Stephen Hester’s main job is to get the value of RBS to a level where the taxpayer can get back the £40bn+ it cost to bail it out. If he does that I’m happy for him to get a few million in bonuses
OK, here is my mantra again. BONUSES DO NOT WORK! They are blatantly unfair (Hester did not do the deals or sell the loans and capital) although he must have approved redundancies – the easy bit. Danny Alexander is right that we need a country, not just banks, where there is no bonus culture – like Germany and Japan.
All my research in this field indicates that bonuses paid on individual performance do not work, and bonuses based on targets just corrupt.
So, stop discussing the size of the bonus and start disputing the PRINCIPLE.
Bonuses – pay to linked 1) individual performance 2) company performance
Remind me why that is a bad thing?
Where has all this “bonuses don’t work” nonsense come from? One story about one bank?
Ask someone in a job with a decent bonus whether it’s a good incentive.
Ask a business owner whether paying bonuses out of company profits is something they do for the fun of it and because they have money to burn, or something they do because it gets results and improves morale.
Of course bonuses work. Whether the targets are appropriate is conceptually separate.
@ Simon
It’s a bad thing because it invites participants to game the system. For directors this might be as simple as setting easy targets or ones based on inside information or ones based on inappropriate metrics. It is effectively impossible to smoke out this behaviour. Then there is how the business is run – for long term value or to make the target, get the bonus and leave? Thery are often diametrically opposed. The result is an increased frequency of bubbles and busts. Bank traders are expert at gaming bonus schemes.
From today’s other news comes the story that the Govt is to cut the equivalence in GCSE terms of many vocational qualifications “such as horse care” which has been deemed worth 4 GCSEs. Really this is just another example from a different sector of bonus driven behaviour, the bonuses in this case being brownie points for schools. On R4’s Today this morning we had the treat of Blunkett saying that very few of these we done in schools by under 16s only to be contradicted by an avalanche of emails from parents said otherwise. I was told years ago by contacts that the use of vocational equiivalents was a popular tactic to “rescue” failing schools. Of course, it’s all gold-plated BS. Is the DfE just finding out now?
Bonuses may appear to be rigorously market driven but in reality what they have helped deliver is akin to the failed Soviet system which ours increasingly resembles.
“Bank traders are expert at gaming bonus schemes.” — In that case, why do banks still offer them? They’re presumably as capable of working this out as you are. Is there some tax advantage in making payments as bonuses rather than as salary?
Fundamentally, what upsets people is this idea that a bonus is intrinsically wrong if it’s more than a financial pat on the head — it’s the “they’re getting paid to do the job already, why do they need a bonus?” argument. Nonsense, but emotionally compelling nonsense.
And equally fundamentally, there’s the “What do people need so much money for?” argument. Again, emotional, and based on the assumption that it’s always other people who are wealthy, not (equally deserving) us.
Whether bonuses work is a separate question, but it’s a technocratic not an ethical one.
…………………………….Bank traders are expert at gaming bonus schemes.” — In that case, why do banks still offer them? They’re presumably as capable of working this out as you are…………………….
Banks etc are in the bonus culture “because everyone else does it”…I seem to remember that most studies show that incentive schemes are not effective as far as the quality of results go. If bonuses were stopped tomorrow would overall performance suffer? I doubt it. I imagine if you asked Hester if a bonus makes him perform better he’d say, “No”.
One of the reasons (if not the main one) for the financial disaster was the bonus culture….’Fred the Shed’ and the rest were driven by bonuses. We were told that we ‘need risk takers; fine when it’s your own money but a disaster when it’s other peoples’. If I pay someone £1.2M I expect to get someone who will give me 100%, if not I don’t want him.
@ Malcolm,
I don’t say that bonuses are intrinsically wrong, only that they tend to create perverse incentives in proportion to the bonuses. In practice it’s extremely difficult to design bonuses which align directors’/employees’ interests directly with those of the employer.
As to why banks pay bonuses, I covered this in a post last year.
http://liberaleye.wordpress.com/2011/03/18/why-rbs-and-other-banks-pay-big-bonuses/
It isn’t the giving out of bonuses that’s the problem here. Who is actually responsible for RBS’s performace? Is it a small cabal of executives or is it the ~148,500 people that work for them? I’d have no problem with a bonus of £7 being given to all their employees instead, or a bonus equating to a small percentage of employees’ earnings, so the bonuses are proportional to all employee’s salaries. I do have a problem with executives taking the rewards of their employees’ labour. Hester’s bonus equates to ~100% of his annual salary. Are all of RBS’s employees getting the same percentage of their salary in bonus? Thought not.
If the bonus pot was shared out equitably, we wouldn’t all be here discussing it. The issue is about value for money. The people at the top of organisations within our society keeping thinking that they are entitled to an ever increasing share of the rewards of our joint enterprise, and they keep getting away with it. Meanwhile, we have a government that is arguing how we need pay restraint, painting a picture of the unions as being evil on the basis that they are defending the pension contracts their employer agreed to, etc.
‘Double standards’ doesn’t even come close to describing the current situation. The current levels of inequality in society are reminiscent of those that preceeded and caused the great depression. Inequality isn’t just about social justice in the sense that we should all be nice to one another – Inequality prohibits our economy from functioning well by prohibiting equality of opportunity – it prevents markets from working efficiently and drives down productivity and growth.
I think the questions arise:
1) are the parameters upon which Mr Hester’s bonus is assessed the most sensible ones?
2) do the people who set the parameters and judge the performance have the ability to do so?
and, most importantly,
3) how much of any objectively-measured increased performance of the bank is down to the Chief Executive, rather than the teams below him/her?
I am sure that the Board and the Chief Executives who dragged this bank (and other banks) into the mire a few years ago believed they were doling out bonuses for good performances and that the bonuses would improve the performances. Were they? Did they?
Mr Hester is paid these very large amounts of money because he has a job handling very large amounts of money.
Well now, so do our politicians. Our MPs sit on committees and vote on billions going here and there and if they get it right billions are saved and if they get it wrong billions are lost. So, by the same argument, our politicians should be given bonuses of millions, and perhaps they could set up some sort of rewards committee amongst themselves to decide how much they should be and what terms should exist to make them fair rewards.
Now you might say that is daft because they are setting their own terms. So, let us to make it really fair, bring in politicians from other countries to decide what bonuses our politicians should have. They should, I am sure, be very happy to suggest our own Mr Danny Alexander gets paid a modest few dozen million pounds if the economy if tolerably better when the government reaches the end of its term and has made cuts which have saved the taxpayer billions, so what’s a few dozen million from that?