Bonuses for bankers: can they be justified? That’s the question everyone’s asking following RBS’s announcement that it made eye-watering losses of £3.6bn, but paid out bonues to staff worth £1.3bn.
Lib Dem deputy leader Vince Cable is dubious:
It’s hard to understand why £1.3bn is being paid out in bonuses when RBS continues to make losses. RBS rewarding individual bankers is like a football team paying their striker for scoring when they’ve just been relegated.
“While it is good news that RBS is meeting its mortgage lending target, its lending to business has fallen. The Government has to get a grip and explain how it will exercise its 84% shareholding in RBS to benefit the taxpayer. At present we are seeing very little. Part nationalised banks are for lending, not bonuses.
“Stephen Hester seems to think that his only goal is to push up the share price. But RBS has made a commitment to support recovery by ensuring that viable businesses are not starved of capital. If RBS doesn’t lend to businesses they will go bust and people will lose their jobs. The lending agreements for 2011 need to be more concrete, long term and better policed.”
But is Vince being wholly reasonable? After all, the bonuses being paid are being paid in stock, and though some shares can be cashed in as early as June, other staff will have to hold on for at least five years.
Moreover, as Philip Hampton, RBS chairman, pointed out, the bank is facing “uncomfortable amounts of staff (leaving), but I hope we have done enough to help ensure it is damaging but not destructive”. Do we really want an exodus of the top banking talent from the banks in which we, the taxpayer, have a stake to those banks which are not part-owned by the state?
Discuss …
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12 Comments
The liberal thing to do in cases like this is for consumers to take action by voting with their feet, as in other cases of companies which behave badly.
Of course there is a role for the state in, for example, enforcing animal welfare laws, preventing pollution, regulating banks, & what have you across all sectors of commerce. But what will force businesses to take notice is if consumer action prevents them from making money in a certain way & encourages them to make money in a certain other way, such as companies behaving more ethically.
There is “greenwash” & there are banks pretending to be more responsible when they are not. But a liberal government will make sure that no enterprise makes false claims about what it does, & people in the marketplace can reward or punish it accordingly.
What I am saying is that the Co-Op & building societies are there. I once banked with Shat West, but no longer. I invest my life savings with Britannia, who have always been strong in the region, & with whom my grandparents invested money on my behalf when I was born. It was a sacrifice for them but it clearly yielded rewards which are now the basis of my life savings when I got hold of them at 21. When they became part of the Co-Op, a move which I supported, I was glad to get the membership rewards. As the year wore on I got more irked at bankers profiting at my expense, & I started reading about people switching over to the mutuals so I made the move myself in January.
The fact is, any LDV readers who are with the bailed out banks are encouraged to do the same. You will be part of a stable, sustainable & rewarding enterprise. Did I mention rewarding, in bottom-line terms?
Vince is right, though, that if these banks are in public hands then we have the chance to do something better than a mindless reversion to the status quo. The government want to go back to 2006 but I don’t, because it’s impossible but also because I wouldn’t have wanted to in the first place.
Would the economic liberals & the mutualists not agree on this?
We keep hearing “top banking talent” being said over and over. Top of what, the list of people who created this whole mess and oversaw these huge losses? I find it difficult to justify making a special effort to retain these people, and am more inclined to look for ways to ensure they have no further control over major businesses, state owned or not.
There is an argument to say that because the investment banking arm made a healthy profit, and only the toxic debts from the retail arm dragged the bank into loss, bonuses are justified – however, I’m sure that most people would agree that handing out bonuses of this magnitude (albeit smaller than they once were in RBS’ case) is at best bad taste, and at worst morally questionable. The remaining issue for debate is about whether or not the State should ‘interfere.’
asquith, I’d agree that under normal circumstances, the liberal thing to do would be to allow/encourage customers to leave the bank and join a mutual (I bank with the Co-Operative too, via Smile). Trouble is, inertia and strong marketing means this sort of protest/boycott rarely has much effect on companies’ bottom line – witness Nestle’s CEO famously reacting to news that customers were thinking of abandoning his company’s products in the aftermath of the African baby milk scandal by saying ‘let them try’ (or words to that effect).
Remember also that RBS is a special case. It is not a regular player in an open and free market – it is 84% owned by the taxpayer, which means that democratic concerns trump market ideology in this case.
Standing by whilst the robber-baron banker make massive losses and still pay out huge bonuses is not an option – legislating against ‘bonuses-for-failure’ may be the only thing we have left to assert some democratic influence over what is essentially our national bank…
That’s always the trouble, Prateek Buch, in that most people are inert or indifferent. I don’t rule out regulation of the banks or other areas.
You’re right to identify that talks of a free market become meaningless in this context. I lean towards the economic liberal side, though not a full libertarian, so I think we’d be better off with a free & open market. The trouble is indeed that it doesn’t exist. You also get this with other countries subsidising industries, our subsidies to farmers, proitectionism & so on. I think it achieves nothing, but it is questionable what a unilateral adoption of free markets & free trade would do in one country.
It’s a sad world we live in, & it’s a torrent of tears that were unleashed on us the day the banks were bailed out. I am in agreement on this. But of course it is beneficial when consumers get going, as well as other ways of making things happen.
I am not talking pie in the sky stuff. I can’t actually find the figures now, but my own switch was inspired by reading about others who had done the same. Things which have really happened over the last year & a bit.
“RBS rewarding individual bankers is like a football team paying their striker for scoring when they’ve just been relegated.”
This is a silly comment as it confuses contractual and non-contractual pay.
It is an analogy to keep paying bonuses as well. Just after relegation there is a good case that a team would need to keep their striker – as they’ll need his goals to get promoted next season
It’s just dead simple: losses should mean no bonuses. Full stop.
These “talented” people who are leaving the UK are the same “talented” people who caused the crash in the first place.
They were incentivised to do so by excessive pay and bonuses.
What will the recipient countries do to stop these people being irresponsible again?
It is in the interests of the international community to clamp down on this kind of thing.
Quote from Jospeh Stiglitz:
“One issue that I try to raise in my book Freefall is that good information is necessary for the functioning of a market economy. The banks’ accountants were originally very clever in coming up with legal deceptions to avoid paying taxes — you might call it “creative accounting.” But then they discovered they could use some of the same techniques to deceive investors. And that’s a lot of what all of this great, high-paid talent in the banking industry was up to over the last 20 years. They weren’t trying to make our economy work more efficiently; they were engaged in what we call regulatory accounting and tax arbitrage. In other words, they were deceiving investors, deceiving the tax authorities and deceiving the regulators. “
In what other industry apart from investment banking are 30-50% of the company profits paid out in bonuses to staff?
Its a ludicrous way to do business and the fact bank shareholders haven’t acted to stop this ridiculous level of renumeration at their own cost just shows that there is a fundamental flaw in the system of shareholders being represented in boardrooms by directors that have a personal financial interest in renumberation being kept high.
They try to justify the high bonuses due to the risks they take but its not their money they are risking it is investors and shareholders money they are risking.
“This is a silly comment as it confuses contractual and non-contractual pay.”
I suspect you’re going to be very disappointed by the level of political debate over the next few months.
I think you’ll find that a soundbite dumbing economic policy down into football-speak is as good as it will get.
There’s a problem with the whole discussion of this issue in that most of us hear “bonus”, and think that’s somehow a wholly discretionary extra little something for doing your job really really well; whereas in some occupations it’s absolutely part of the relationship between employer and employee that much of the renumeration will be performance-related, and that is what a bonus is. Anyone thinking that if it’s performance-related nobody should get anything in the current circumstances is succumbing to the same bizarre logic as is shown in St Vince’s remark about football clubs. Strikers do indeed get paid – indeed get bonuses – for scoring goals, and players get win bonuses for every game they win — even if the team gets relegated! And why not? People are paid for doing their own job, not for everyone else doing theirs.
All this is quite separate from whether some bankers (and indeed footballers) are ridiculously overpaid. Of course they are – whether through bonuses, shares, or any other mechanism. But what to do about it? I agree fundamentally with asquith on how we should react as consumers, though it’s not always as easy as that. If you have a mortgage (and if you do, it’s almost certainly the most significant customer relationship you’ve got with the financial sector) it can be very costly to switch providers, and given the tightening of lending conditions may be impossible. It’s a short-and-curlies situation.
The jobs for which these bankers get their million pounds plus bonuses are just jobs that smart graduates can be trained to do. They are not jobs where you have to go through thousands of people to find the one or two with the talent to do it. Mostly, if you look right, sound right and have a good degree, you can get in on the training programme, and you can do it.
The reason they get paid huge amounts of money is because they can. The way things are run now, almost everything that supplies us all with what we need to live goes through a small number of very large companies. If you’re sitting on the pipes where the money flows, taking your feed, the feed you can take, even if it’s a small proportion, is a very large amount for one person.
They claim to be “creating wealth”. But are they? Or is it like when a big supermarket opens up and claims to be “creating jobs”, ignoring the fact that it does so by destroying more jobs in smaller enterprises? Or is it like the postman might claim to be creating huge amounts of wealth when all he did was deliver a letter which achieved the legal transfer?
The problem is, yes, it is convenient for us to use things like big supermarkets and big banks. We might in theory like the idea of smaller scale things, but in practice it’s just easier to go with the economies of scale. So we let these peole take over, and in time they destroy everything small scale they are competing with anyway, so we have no choice but to use them.
It’s like government in those countries where it’s expected for politicians to be corrupt. Whichever ones you have, they’ll be taking their millions and doing it because they can. Since a government of some form is needed, people just accept it and shrug that’s how life is. When you see a politician with huge amounts of wealth, you favour him because it means he must be a good politician to make all that wealth for himself.