There\’s two distinct arguments going on about bank bonus payments at the moment: unfortunately, the possibly meritorious one is being used to bolster the case for the less so.
Think back a couple of years and we were being told that it was the chasing of bonuses that caused the crash. In essence, that if peeps could take a hugely risky trade, keep it together over the bonus qualifying year, then they\’d get millions. But if it then fell apart in the next bonus year then they didn\’t have to pay back those bonuses. One way bets in short, backed by bonuses being paid out in cash at the end of said bonus year.
Now quite how much weight we should put on that argument is, well, I don\’t know either but I wouldn\’t put too much on it. While I\’m absolutely certain that some did indeed do this I\’m also absolutely certain that being able to cut bankers\’ remuneration in the bad years by not paying bonuses was and is worth something to the banks. They\’re able to trim their wage bill much more easily than if everyone was simply on high salaries.
Note, please, that bonuses really did fall in those recent bad years: they varied sector by sector within the banks\’ businesses, even if the overall totals don\’t seem to have changed much. That the metals traders in a bank\’s LME unit made zillions for the shareholders and thus earned large bonuses could be (and was) true while those who had been playing with bundled mortgages lost zillions and got no bonuses.
As an aside, it\’s also rather difficult to attribute greater risk taking solely to bonus chasing. I think we\’d all agree that there has indeed been greater risk taking since, say, the early 1980s and Big Bang time, but can we really ascribe it all to bonus chasing?
Well, no, not really, we can\’t, for people have been studying risk taking. Yes, men are more likely to take risks than women (this is on average mind, there are some women just as risk taking as the most risk loving man and vice versa) but, and here\’s the most important point, in mixed sex environments both men and women take more risks than either do in single sex environments.
And what has happened since the early 80s? Yes, that\’s right, the women of my and the subsequent generation have been able, in a manner that really didn\’t exist before that, to enter the City to work at the trading desks (rather than the secretarial position for a few years while they decided which trader to marry). Standard observation of the human species would thus suggest that in such a mixed sex environment more risks will be taken.
So bonuses certainly aren\’t the be all and end all of it.
But, recall what we were being told a couple of years ago: it was the short-termism brought on by the bonuses that caused the problems. The solution was for bonuses to be paid over time, partly/mostly in share, with claw back provisions and so on. And this is now in place. Various EU and UK rules have meant that no one gets a large cheque in January to spend as they wish with no come back if last year\’s trades fall apart.
So we\’ve solved this short termism problem, haven\’t we?
Well, yes, but look what\’s happening to Bob Diamond:
Britain\’s best-paid banking boss, the Barclays chief executive Bob Diamond, will face intense pressure from MPs to waive his multimillion-pound bonus this week in recognition of the austere economic conditions and public intolerance of outsized City pay cheques.
An appearance by Diamond in front of the Treasury select committee on Tuesday is set to become a key clash between Westminster and the City as the coalition\’s efforts to tame bankers\’ pay falter.
Last night MP John Mann, a Labour member of the committee, said he and others would call on Diamond to forgo any bonus for 2010, when he was head of Barclays\’ investment banking arm.
Hmm. Of all the people you might want to pay a large bonus to Diamond is one of the top few. Firstly Barclays didn\’t go overboard into bankruptcy, unlike some others. Secondly, when the shit hit the fan they found (Diamond found) Middle Eastern sovereign wealth funds to shore up the capital and thirdly, he made the bank a fortune picking up bits of Lehman Briothers.
But there\’s more than this. Diamond is already paid long term, not short term bonuses. Back two years sure, he got a stonking great payout….from long term share based compensation schemes. He also lost £11 million on his restricted stock at the same time. Everyone\’s already got Diamond\’s nuts in a vice: his long term wealth is tied up in the value of Barclay\’s stock, just where everyone wants it to be.
So our story one, about short termism, simply doesn\’t work any more.
Which is where we switch to story two. \”Public intolerance of outsized City pay cheques\”.
Now forgive me, but I don\’t think there is widespread such intolerance. I think the intolerance is squarely based in those upper middles classes who aren\’t bankers. The MPs, top end journalists, editors, chatterati and so on who, for much of the past century or more would have made similar (ish) incomes to merchant and commercial bankers. In the past couple of decades a large gap has opened up between the two groups, City and non-City. And that\’s what hurts.
Not that bankers are getting huge sums but that those from the same sorts of backgrounds, families, schools and colleges who went into the City are now getting multiples of what those from those backgrounds are getting if they didn\’t go into the City.
If you like, it\’s the old English disdain of those in trade coming out.
Or to be more accurate, it\’s simply the Pollys, Johanns, of this world getting jealous.