A rationale on bank bonuses

Last week, I decided to post blogs for and against bank bonuses.

I was surprised at the reactions to the case in favour, which drew more comments on a single posting  than most of my blog entries.

This is obviously an emotive subject.

By posting both sides of the debate, I can actually see that both sides have elements of right and wrong.

The truth be told however:

Those banks that would be bankrupt if the government had not  provided funding from taxpayers have zero justification to pay a bonus.

I know that bank bosses will talk about ‘contractually bound’, ‘it’s for the folks who are deserving, such as tellers’, ‘if we don’t pay a bonus our best investment bankers will leave and we’ll never recover’, and so and so forth. 

This is a non-argument as the bank would be bust if it were not for government money. 

There is no justification for a bankrupt bank to take government / taxpayers’ money, and just give it to those who are deserving or undeserving, as they would not have a job right now if the bank had been allowed to fail.

This is the bottom-line: if the bank were not saved, it would not exist.

Therefore, for banks that have taken government bailout pounds and dollars, any bonus should be killed.

Taking this a step further, the whole bonus culture should be reviewed anyway. If all banks stopped paying massive bonus amounts, then there wouldn’t be this 'bird feeding' culture. So surely now is a good time for all the banks to just say, “OK, no more bonuses”.

In particular, if the banks that are doing well did this as well as the bailed out banks, and now is as good a time as ever, then there would be no mass walkout or jeopardy. It would just kill this bird feeding culture and show the stupidity of paying millions to folks who had a good, or lucky, year.

The trouble is that you then have the view that the banking world is like the football world - the best players get the best money and, if you stop paying it, they walk out.

But I think the idea of a mass walkout is a bit of a fallacy.

If you don’t pay your investment bankers a big bonus this year, where are they going to go?

Hedge funds? Half of them have gone out of business.

Another bank? There aren’t many mainstream investment banks around who need them right now, and certainly not at those inflated figures.

This is not a time for concerns about mass walkouts, it’s a time for concerns about the future and how to get rid of this bird feeding culture.

To put this in context, read the classic City book, “At Bonus Time, No-one Can Hear You Scream”. Rather than quoting from the book, here’s a review by investment banker blogger Financial Crookery:

“For many investment banks, January is the month when it happens. The phone rings, the foot soldier trots down to the honcho's office, and, with a poker face worthy of Phil Ivey, hears about a dozen words and nods non-committally. A simple ceremony at the culmination of a year's warfare. “The bonus process starts around October. No, strike that.....what am I thinking. Unofficially its more like July....er..no, make that April. Yup …

“In good times, the line manager's job - let's say ‘Head of Derivatives Sales’ for example - is a breeze. Say the right things to the mob underneath, hire aggressively, let the market do its thing and get on with your own upwards management.

“Due to the apparent ease of this management game compared to the grisly business of finding actual customers and making them want to do profitable business with you, it is no wonder foot soldiers vie to join management ranks. Of course there are never enough proper management jobs, so important sounding but irrelevant roles are invented to accommodate the dissemblers in good years. Yet everyone knows who pulls the strings, who is the only person that counts: the guy in front of you in January.”

I think this blog entry and the book puts it all in context.

So my own personal opinion is that banks that have failed should have all their bonuses scrapped, and banks that have succeeded should have their bonuses capped. We need to get rid of this culture.

And the only bonus scheme I’ve enjoyed hearing about this season is Credit Suisse’s, where the bonus is tied to toxic assets making good. That’s a great scheme as (a) it means you have to get the things that failed to work and (b) you have to stay around until they do.

Meanwhile, to provide some balance, here’s the latest thoughts from the media:

Backlash over bankers' bonuses, the Independent:

"A mutinous backlash is growing in Britain this weekend against banks' plans to carry on paying staff millions in bonuses as if the credit crunch had never happened. The Independent on Sunday understands that the Government intends to try to head off the rising tide of resentment against bankers by saying that it will be an 'active shareholder' in the institutions receiving significant bailout cash, and say no to 'excessive payments'."

Royal Bank of Scotland to pay staff £1 billion in bonuses, the Telegraph:

“In an attempt to appease ministers, RBS has indicated that no individual banker will receive a bonus with a cash element of more than £25,000 under its plans. The remainder of the bonuses, to be paid next month, will be in RBS shares, with a large proportion of them deferred or not paid at all if an employee leaves RBS within an agreed period, or if their area of the bank makes significant losses in the following two years … About half of the bank’s ‘bonus pool’ will consist of payments that RBS believes it is contractually obliged to pay.”

RBS ‘toxic’ loans chief paid £40m, the Times:

“A ROYAL BANK OF SCOTLAND executive who led its investments into “toxic” sub-prime loans was paid close to £40m in just three years, The Sunday Times can reveal. Jay Levine, 47, was the bank’s highest-paid employee, earning almost four times more than former chief executive Sir Fred Goodwin … Levine announced he was retiring from RBS in December 2007, but has since been appointed chief executive of Capmark Financial, a lender specialising in commercial real estate. At Capmark he replaced William F Aldinger III, the banker who sold sub-prime mortgage business Household Financial to HSBC in 2003.”

Barclays set to give big bonuses to bankers who scuttled Woolworths, the Times:

“Barclays Bank is ready to award bonuses of up to £1.1 million to corporate bankers who pulled the plug on Woolworths and other leading high street names. The bank’s commercial arm, which lent to a number of collapsed retail chains, will decide soon whether to pay out millions in bonuses to top bankers. David Marks, the head of the commercial arm, has been guaranteed a bonus of about £400,000 on top of his basic salary of £700,000. Wyatt Crowell, Mr Marks’s deputy, who joined last year from JPMorgan, the US investment bank, is on a guaranteed pay-and-perks deal worth £1 million a year, and a half-dozen other staff are understood to be have been recruited on similar packages.”

Alastair Darling, UK Chancellor in the Telegraph:

“I know people feel angry about excessive bank bonuses. And directors have a duty to ensure that their banks behave responsibly. People who work hard should be rewarded for their effort. But it would be wrong to reward people whose excessive risk-taking brought the banks down, causing misery to millions of their customers. Success should be rewarded. Failure should not.”

“Inquiry into City bonus fairness”, the BBC:

“The leader of the Commons has asked the Equality Commission to examine City bonuses and rule whether they discriminate against women. Harriet Harman told a Labour regional conference in Sheffield that men working in the finance sector are paid over 40% more than women. In her speech, Ms Harman described the bonus system as a ‘licence for unfairness and discrimination’.”

Banks could still find wiggle room in pay caps, The Associated Press

“The squeeze on big paydays for executives of bailed-out banks will probably leave Wall Street plenty of wiggle room. Consultants on executive pay say the caps imposed by President Barack Obama on Wednesday will probably apply only to a few executives - not star traders, brokers and salespeople who routinely earn whopping pay packages.”

Credit Suisse to pay bonuses in toxic debt, the Independent (December):

“Credit Suisse has hatched a cunning plan to avoid public condemnation over executive bonuses this year: it is going to pay top managers not in cash, but in the toxic mortgage assets that caused the credit crisis. Thousands of managing directors and directors will be handed a slice of a new internal hedge fund, into which the bank is transferring some of its $5bn (£3.3bn) in illiquid investments.

“These are the complex mortgage derivatives and leveraged loans whose collapsing value has cost the global finance industry $800bn in writedowns in the past 18 months, triggered recessions around the world and caused a public outcry over Wall Street excess. Credit Suisse is the first bank to use the debt to pay employees.”