Even bankers want the bonus culture outlawed. It’s a conspiracy to extract money from firms that properly belongs to others
Ban bonuses. They are mad. Discretionary gifts to top executives from company funds should be considered a malpractice. Most British directors are paid exceptionally well – over 40% more last year according to one report – and if the result is exceptional that is right and proper. Profits should be returned to those who own them, the risk-bearing shareholders. That is capitalism. If shareholders want any money held back for staff after a good year, it should be shared equally. Governments pass laws on insider dealing, takeovers, labour discrimination and health and safety. Any minister who can’t ban bonuses should pack up and go.
This subject has become politically poisonous in the case of banks not, as Sir Roger Carr of the CBI said on Tuesday, because MPs and others are “corroding trust in the industrial and commercial fabric of our society” by tainting big business as “run by the greedy few at the expense of the many”. As David Cameron has said, the poison is because bonuses in Britain (not elsewhere in Europe) are “out of hand”. It is the bonus culture – not high pay, recklessness or incompetence – that has polluted banking’s public image. Cut out bonuses and I guarantee the rage would subside. Fred Goodwin might even have kept his knighthood.
Bonuses entered British corporate culture in the 1980s as a device for enabling bosses to line their pockets with some of the cash swilling through newly deregulated balance sheets. The habit spread fast, infecting the professions, the civil service, local government, the NHS and even universities. Bonuses became rampant wherever size allowed “HR consultants” with opaque reward packages to run riot. Thus did the ratio of average pay to executive pay at Lloyds bank rise from 1:13 to 1:75. Most big companies followed suit, but banks were way out in front.
The concept of pay incentive is pure sophistry. Top executives are said to be unlike ordinary workers in needing a Pavlovian prize at the end of each year to tempt them to do well what they have already been paid to do well. In some banks, senior staff are being awarded half the gross profits of their divisions. This is not their money. As Tony Shearer, boss of Abbey Protection, boldly remarked on Monday’s BBC Newsnight, a normal person should regard being offered “an incentive bonus” as an insult.
Figures out last week showed that the 1,265 top staff in the eight leading London banks received an average of £1.8m each in 2010, as they struggled to rectify the shambles into which they had plunged their industry two years previously. They are now clamouring for bonuses totalling billions. This cannot be a response to need or entitlement, or even a reward for risk, since the formulas are always fudged to ensure payment. A bonus is a bling status symbol, to be shouted across a City bar or boasted by a trophy wife at a ladies’ lunch. If it were denied to all City employees and a few decided to emigrate, it strains credulity that no one could fill their shoes.
The RBS boss, Stephen Hester, is said to have been deeply shocked at the vilification of his and colleagues’ bonuses. We might wonder how much reality they bring to running a state bank. More alarming is the suggestion that only giant bonuses will motivate their staff to rectify the gambling losses of the boom years with new gambling profits. Surely the boards of state banks might consider “public service” a sufficient motive in rescuing their own industry from self-inflicted ruin. And what does the head of the CBI say to the hundred former Dresdner employees who are suing for £40m in bonuses for their part in its downfall? Banking apologists should have no more truck with incentive bonuses than they once did with outlawed concert parties, boiler rooms and bond washing.
Capitalism, like democracy, needs constant self-examination to retain its vitality. This is the reason for spotting the Enron moment, when greed diverges from corporate purpose so far as to corrupt motive and destroy credit. The past week has seen a mountain of exculpatory rubbish on bank bonuses. Yet the industry seems immune to shame, political attack, government admonition, Bank of England pleading or public contempt. The two RBS bosses relented on their bonuses only when confronted by the modern equivalent of a Gordon riot. This is money, we should remember, that properly belongs to shareholders, customers or taxpayers, not to directors.
The government and others have put forward several suggestions intended to end the bonus culture. Cameron has mooted shareholder activism, self-restraint and greater transparency. His business secretary, Vince Cable, wants AGM votes on performance-related pay deals. Much of this is familiar, like the 12-point plan of the High Pay Commission and corporate reformers since Cadbury and Greenbury in the 1990s. All of them fear harming the geese that supposedly lay golden eggs. All are timid.
Nothing happens for a simple reason that the practice is wholly outrageous. While JK Galbraith rightly called high executive pay “a warm personal gesture by the individual to himself”, a bonus has little to do with any incentive, except sometimes as a goad to short-termism. It is more akin to a conspiracy to extract money from the firm that properly belongs to others.
The much vaunted “free market” is no discipline here. The free market in banks collapsed four years ago, and had to be sustained by government money. The free market in derivatives was distorted by insurance, and that in insurance by state guarantee. The free market in executive pay is rigged by the oligopoly of remuneration cabals and corrupted by tax havens. As Gandhi said of western civilisation, a free market in banking “would be a very good idea”.
Ask honest bankers about this state of affairs and most will hang their heads and moan. The bonus culture is beyond the power of any one person or bank to end. It poisons staff relations and hooks traders on risk. It is driving politicians towards transaction levies and higher taxes on incomes, wealth, property and offshore activity. Is that what bankers really want?
Past governments banned insider trading in response to blatant abuse. Now the authorities should ban insider bonuses. Let honest salaries take the strain. When I asked one banker how he would react to that, he said he would sigh with relief.
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