NEW POLL: what should be done about bankers’ bonuses?

by Stephen Tall on February 10, 2009

One thing you absolutely cannot accuse the Lib Dem leadership of – going soft on the pay bonuses for executives at those banks which have been re-capitalised by the government. Here’s Vince Cable, Lib Dem deputy leader:

The Government must freeze all bonus payments for employees of semi-nationalised banks and ensure that the pay details of those earning over £100,000 a year are published.”

And Nick Clegg has also strongly criticised Labour for not taking a tough line, instead suggesting bankers ‘ask themselves whether accepting these payments is the right thing to do’, and setting up a review:

You don’t need a review to answer the simple question: should senior bankers receive bonuses? The answer is no.”

The contrary view was put by a leader article in yesterday’s Times:

… the demand by Nick Clegg, the Liberal Democrat leader, that no bank executive ever receive a cash bonus has no merit, being in effect a demand that only low-achievers consider senior posts in banking.

It went on to argue:

Bonus payments are a standard part of senior bankers’ remuneration. They also extend to quite junior employees. Bankers are typically paid a basic salary and an annual bonus that is intended to reflect firm-wide profitability and individual contribution. With more junior staff, the aim is to reward effort, progress and potential. In normal times, banking is a competitive business with high staff turnover. This increases pressure on banks to pay substantial bonuses to star traders and other direct revenue-generators.

There is nothing inherently wrong with that system, or with the notion of high rewards for generating profits. The Government is right to seek to limit the cost to the taxpayer of rescuing the banking system, but imposing a ceiling on bankers’ pay would be the wrong approach. Governments have no legitimate interest in setting the rent of ability in the marketplace, even supposing they knew how to do so.

And of course as Alex Foster noted recently on LDV, the law of unintended consequences applies to bonus clampdowns, with New York City and New York State facing a severe downturn in tax revenues.

So what do you, LDV’s readers, think should the government do about bonuses in those banks recapitalised with taxpayers’ money? Here are your options:

> No bonuses should be paid at all
> There should be a government-enforced cap on bonuses
> Payment of bonuses should remain at the banks’ discretion
> Don’t know

Feel free to explain your reasoning in the thread below…

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No comments

Why don’t they give money back from their salaries when they screw up? ie a bonus in reverse

by John on February 10, 2009 at 11:45 am. Reply #

“There should be a government-enforced cap on bonuses” along the lines that Obama has enforced.

My favourite “libertarian” & defender of the pre-2008 system still hasn’t given up:

http://tinyurl.com/c2wkqo

Truly hilarious to see right-whingers can’t accept that the old order is dead.

by asquith on February 10, 2009 at 11:49 am. Reply #

(The politicians are compounding their errors: in order to get out of this crisis, the banks have to rebuild their balance sheets)

Best not give the bonuses so as to recapitailse quicker

by John on February 10, 2009 at 11:54 am. Reply #

What is the collective noun for bankers? A “Wunch”, that’s what.

by MBoy on February 10, 2009 at 12:14 pm. Reply #

Bonus; how about the bigger the loss they made, the longer the rope and the taller the lamp post…

I’m not bitter or anything…

by Martin Land on February 10, 2009 at 12:55 pm. Reply #

If the argument is correct, it means that very senior posts in other fields must be occupied by people whose skills are less than those of middle-ranking bankers. Is it good that all the best people go into banking rather than government, or medicine, or engineering, or teaching, or …?

If the argument is incorrect, well, let’s see – if the banks are nationalised their employees are the equivalent of middle-ranking civil servants, so give them a fixed salary of that level and see who applies to do the job. Market forces and all that – will it really result in a much poorer job being done by the banks, or does it show they operate a cartel which forces up what they take from us their customers – and now owners?

Have the senior bank employees really done all the work that has “earnt” the millions of which they demand a substantial share? Or are they simply in the position of sitting on the supply lines where large amounts of money is passed from one place to another so they can just tap a share of it for not really doing that much? Is this not rather similar to the way that in many countries government ministers regard it as natural that they should have income in the millions gained from tapping the money that passes by their decisions?

If these people getting many times what smart people in other jobs get were really so smart why is it they couldn’t predict what to many others was obvious – that house prices had gone beyond sensible levels and a crash was due? Why is it that what they told us was the correct price for something a couple of years ago is nothing like what they tell us it is now? Are we sure these people are really smart, or are they just making it all up as they go along and pretending to be smart?

If the bonus for making some deal is to set one up with enough wealth to last a lifetime, does this really act as an incentive to make good decisions? Or does it act as a disincentive because who cares about the long term when you can retire on what you gained in the short term?

If the best people were attracted to the job and the best decisions made when very large amounts of money can be extracted from having that job, Nigeria etc would be the best governed countries in the world.

Here’s what to do – work out what the job entails and how that compares to an equivalent civil service grade. Pay whatever that civil service grade pays. Offer promotion to the next grade on doing well over the year. That’s it. Are there really no smart graduates or more experienced people who are ready and willing to do the job under those conditions and could do just as well?

by Matthew Huntbach on February 10, 2009 at 1:24 pm. Reply #

So the Times says “the demand by Nick Clegg, the Liberal Democrat leader, that no bank executive ever receive a cash bonus has no merit, being in effect a demand that only low-achievers consider senior posts in banking.” The problem is that greedy, low-achievers have been in senior posts in banking for too long already.

In fact, let’s be honest. There are very few people out there who are worth over £100,000 a year.

by David Evans on February 10, 2009 at 2:47 pm. Reply #

These bonuses are just froth on the cauldron of wealth that banking alchemy has syphoned from the productive economy over the last year. The current hysteria will die down soon enough, just as the scandalous release of bonuses to Northern Rock employees did a few weeks ago – a wholly nationalised institution!

Even if every single banking bonus was axed tomorrow, the systemic financial problems in our economy would remain. But grappling those fundamental issues is far too problematic and doesn’t make for anything like the same media hype or easy to mount political bandwaggons.

Unfortunately, in the world of the economically blind, even bowed and bonusless bankers seem destined to re-emerge as usurping, usurious kings.

by Andrew Duffield on February 10, 2009 at 3:15 pm. Reply #

no bonuses at all unless it has been earned which these bankers clearly haven’t

by Richard Baxter on February 10, 2009 at 5:06 pm. Reply #

Of course the one missing answer is “the shareholders should decide”.

Which, in the case of some of our banks of course, means the government.

And in the case of others, people who are too disengaged from the real business they are investing in to give much of a hoot.

If, instead of being given our money to bail them out, we had insisted on them recapitalizing themselves, through things like debt for equity to convert some of their short term liabilities into long term capital, I’ll bet the new shareholders that would have resulted would have been a deal more concerned about what their investment was being spent on.

But no, now it is the worst of all worlds – a cartel operating with government money with many of its decisions a matter of public policy.

For what it’s worth, I’m with those who say that few if any of them are worth six figure salaries let alone bonuses, but it ought not to be a matter of public policy.

Incidentally, when I started in stock jobbing, all the firms were partnerships (and before Big Bang fairly small UK owned ones at that). I started on £3,500 a year with the expectation of a reasonable bonus (most young brokers expected a similar or slightly smaller salary but as much as 100% bonus – I got £200 bonus!). The reason, I think, looking back, was that as partnerships the owners of the business themselves did not know what they were going to be able to draw until they knew their annual results and only *then* did they put more money into the “pool” to be split amongst all the employees. So not quite base + commission, but a low salary + profit share.

by Jock on February 11, 2009 at 1:13 am. Reply #

So not quite base + commission, but a low salary + profit share.

Incidentally a model that should not have outlived the parternships. When I chose to move away from London when I realised I could not live on £3,500 in the big smoke away from home the colleagues I left behind were just about to get a £1,000 raise. Six months later, at Big Bang and having nearly all been taken over by incorporated suger daddies in the form of the big banks, those colleagues, still just one year out of school, were put onto about £22,000 (I, in Glasgow, was still on £4k!).

But you have to realize that the entire business is as unreal as the premiership football business. People were getting transfer fees, “golden handcuffs”, poaching whole teams for their reuptations. Few probably remember this, but in the Orange Book, in Vince’s article, he talked then about the “economic rent” in some jobs, like football and banking and speculated as to whether we ought to be trying to capture some of that economic rent.

by Jock on February 11, 2009 at 1:20 am. Reply #

The best one liner I saw on that was in the Telegraph letters page – along the lines “Bonuses should be payable, but subject to 100% tax”.

Problem solved!

by David Evans on February 12, 2009 at 1:36 pm. Reply #

Correct me if I’m wrong – I’d always been under the impression that you got a bonus for going far and beyond the call of duty (or your contract, since I guess medals are for the former). Some idiot on – I can’t remember, either Daily Politics or QT – was suggesting that if a banker wasn’t going to get a bonus, they’d go home early on a Wednesday, or slack about instead of working. Seemingly oblivious to the idea that such behaviour should really lead to getting fired.

It seems to be another symptom of the similar problem of inflation by which an evaluation of ‘Adequate’ is no longer adequate, and every kid at sports day needs to get an award for showing up.

My point being that if a banker, or anybody else, works their contracted hours, doing their job, they have not ‘earned’ a bonus, they have done what they agreed to do, and should get their base salary as specified.

If they’ve actually made millions, then you can understand them sharing in that success.

When they’ve lost billions, and have had to beg other people to bail them out, surely they should just be grateful that they still have an office with heating?

by Greg L on February 13, 2009 at 3:06 am. Reply #

All senior bankers should go to trial for crimes against humanity along with Tony- you can trust me – Blair and his fool of a side kick Mr Gordon- I don’t know what to do- Brown!

by Mr fairbrother on February 24, 2009 at 1:51 pm. Reply #

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