WHEN IT COMES TO BONUSES
When it comes to bonuses, everyone needs to calm down and consider a few home truths, says Ruth Sunderland, editor of Observer Business & Media
“Banks won’t recover reputations until their reward policies seem prudent, fair and reasonable. They seem unwilling to listen.”
One big story has dominated the financial world this year – bonuses.
The furore shows little sign of abating despite the bankers’ obvious view that we should all move along, because there’s no real story here anyway: their line is they’re worth it, and that’s that.
But that is not so much a case of trying to defend the indefensible, as trying to explain the inexplicable. How can it possibly be justifiable that, as City minister Lord Myners has claimed, more than 5,000 bankers in the City will receive a bonus of at least £1 million this year, when there would not be a single bank left standing were it not for the support of the taxpayer? How can it be right that bonuses are back so soon, when ordinary people on modest incomes are losing their jobs and, as the Pre-Budget Report made clear, will be paying for the financial sector excess with extra tax and cuts in public services for years to come?
The issue is, of course, more complicated than it seems at first.
State-controlled Royal Bank of Scotland argues it needs to pay talented investment bankers bonuses or they will jump ship, jeopardising its ability to reimburse the taxpayer. It’s also difficult to clamp down on bonuses in a way that can’t easily be circumvented, or that doesn’t lead to unintended consequences.
But the banks have not responded to the legitimate challenges to the bonus culture constructively enough: instead, there have been a series of threats. Take the suggestion that the board of RBS would stand down if the government attempted to curb its bonus largesse, and just think for a moment about how that would be perceived by the media and the public. It would be viewed as holding the Chancellor and the country to ransom and reneging on their commitment to save the bank. Directors would come across as unpatriotic, and worse.
Then there are the constant threats by bankers, hedge fund managers and private equity firms that if they don’t get their bonuses, they will leave the country. These claims cannot be taken at face value. While it is relatively easy for a Mayfair hedge fund operation to up sticks to Geneva, it is not such a practical proposition for the likes of Goldman Sachs. And to be seen to relocate in order to continue dishing out bonuses, or to avoid tax, would in itself be highly damaging to the reputation of any firm wanting to be a good corporate citizen.
The reaction to Alistair Darling’s tax on bonuses, soon picked up by other countries, was predictable. Bankers, the headlines screamed, were “angry”. How do they think everyone else feels? As a line of defence, it is pretty weak.
Everyone needs to calm down and consider a few home truths. First, investment banks cannot realistically claim they are paying rewards for talent, when this year’s bonuses come as a product of practically free money supplied by central banks. Second, in efficient, properly functioning markets, excessive bonuses should be competed away. The competition authorities, and the customers of the banks, should be asking searching questions as to why this seems not to be the case.
Third, the banks will not recover their reputations until their reward policies are seen to be prudent, fair and reasonable. All businesses need a social mandate in order to operate: broadly, society needs to feel what they do is acceptable. The banks lost theirs; they seem not to know why, and when told, they seem unwilling to listen. In 2010, their New Year resolution should not be to protect their bonuses; it should be to win that mandate back.
