Morality is not practicality: keep bankers’ bonuses

Wanted Poster of Sir Fred Goodwin at Holburn tube station in London [Takomabibelot]

Wanted Poster of Sir Fred Goodwin at Holburn tube station in London [Takomabibelot]

Recent months have seen an anti-banking consensus emerge amongst the general population and the media. Bankers, and perhaps most notably their bonuses, have been implicated in the blame game currently being played out between banks, governments and regulatory bodies, in the wake of the financial crisis.

The Royal Bank of Scotland (RBS) has come under fire from the Government in the past few days for attempting to pay what are perceived to be ‘excessive’ bonuses. The Government currently has a 70% stake in RBS. Having received taxpayer money so recently, the decision to revert back to large bonuses is being seen as audacious.

In a similar case in the United States, leading investment bank Goldman Sachs paid 1556 members of staff bonuses in excess of $1million. This was despite the fact it had recieved emergency funding from the American government.

Last week, Deputy Labour leader Harriet Harman said: “They already earn vast salaries and now they are threatening to resign if they cannot indulge in largesse and the distribution of massive bonuses to top executives across the piste.”

On the subject of bank bonuses, Prime Minister Gordon Brown said that “nobody is being discriminated against, because every bank is having to follow these
procedures”. However, we believe restricting bonuses is idealistic and misguided. In the ‘real world’ not all banks have to follow this protocol and if Brown honestly believes this then he is deluded.

Limiting or removing bonuses is neither practical nor prudent. The consequence of imposing any kind of restrictions on bankers’ bonuses is a ‘brain drain’ effect. This can occur between banks, as bankers will simply move to firms that are willing to pay them more for their skills. Those institutions not restrained by the hand of Government will poach the best talent. It can also occur on a national level. If countries impose strict guidelines on pay and bonuses, multinational firms will simply re-locate and re-distribute their operations elsewhere.

Following on from this, some would naturally call for internationally agreed regulatory standards, but this is simply not a feasible option due to conflicts of interest between nations.

Tough regulations on bonuses could have drastic consequences for the UK economy, which relies on the financial sector to provide both jobs and lucrative tax revenue. Many voters fail to realise the amount of capital that flows in and out of London on a daily basis.

What is the use in having the financial heart of the world when there is no blood coursing through its veins? Heavy regulation would cause the UK to haemorrhage the cash flows it relies upon so greatly.

Bonuses however should not be handed out as a right. They should be directly linked to a bankers’ long-term performance and should not reward reckless risk taking. Any gambling element of banking should be minimised.

Alistair Darling, Chancellor of the Exchequer, said that “there are people who are too complacent in my view”. Darling also stated that the banks “need to be brought down to earth”.

We urge Darling to follow his own advice and not be too complacent with the UK economy, as going after the populist vote would be an all too easy mistake to make. Compromising the UK economy’s most vital asset for increased political support would be an irresponible decision. Although it may not be the moral option, bringing banks ‘down to earth’ may cause the UK economy to come crashing down with them.

7 comments

  1. I have to admit I read this article with some amusement. Well, I call into question its portrayal of a symbiotic relationship between bankers and society. Yes, they generate income, provide capital that ultimately creates jobs and etc. But this is a bit like saying you need your abusive husband because he earns money. Sometimes, you have to weigh whether the abuse you get is better than being independent, though no doubt the latter will be hard.

    I say this because of two fundamental problems with bankers and their performance. First, there is no balance between risk and reward. Everybody wins when the times are good, especially bankers with their large bonuses. However, when things take a turn for the worse because of the latter’s decisions, society is left to foot the bill. Sure, plenty of bankers lost their jobs, but that’s after they have profited massively from the bubbles they created. Besides, many others who were not in the driver’s seat of crisis creation also lost their jobs. Is it surprising that people are angry, especially when the bankers want to keep their bonuses despite all this?

    And aren’t the trillions that taxpayers have spent to bailout the banks a good enough demonstration of a lopsided relationship? Privatising the gains and socialising the losses – that’s a good description of current practice.

    Second, bankers’ performance is overrated. The article says that bonuses “should be directly linked to a bankers’ long-term performance and should not reward reckless risk taking”. But the point is that’s not how they work. Bankers are rewarded for the right results regardless of whether they did it right. They get the money as soon as they show that they are turning a profit. The large bonuses are not given only after they can show many years of consistent results, the ultimate proof of good performance. That wouldn’t be something the bankers want either, and hence they would also quit. Thus, the article’s call for not cutting bankers’ bonuses can only mean one thing, and that is the continuation of a broken system.

    The conclusion that I draw is therefore very different: We should cut their bonuses until the bankers have something to show for them. Otherwise, all we are doing is incentivising bad behaviour. It might be hard to cut a hand off, but we should if it turns out to be gangrenous.

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  2. “I say this because of two fundamental problems with bankers and their performance. First, there is no balance between risk and reward.”

    This is a very good point. It is not however a reason to cut down on bonuses, but a reason for harsher punishment when bankers fail.

    In my opinion, the government is very misguided in its attempts to prevent more crises. Personally, I believe that the government should target speculation and ‘quick profit’. Take things from the beginning: why was the stock-market created? So that companies could raise capital quickly and efficiently. People would invest in companies because they believed that they would prosper in the future.

    Now, you have people who buy a share and sell it after two minutes. Even worse, you have algorithmic trading, that commits thousands of trades within seconds. This does not promote growth, nor does it help a company; such techniques have been designed purely for profit, without actually producing anything substantial. Money is made out of thin air. I really cannot see how this is morally justifiable.

    If the government wants to prevent another crisis, it needs to restrict such practices that create bubbles. Either place a tax on short-term trades, or ban algorithmic trading all-together.

    A.

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  3. > This is a very good point. It is not however a reason to cut down on bonuses, but a reason for harsher punishment when bankers fail.

    Well it could be either or both, since they are two sides of the same coin, “carrot and stick”.

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  4. And what do you mean by punishment anyway?

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  5. Well, I do not see the point in reducing the rewards if someone is really worth it… as long as they are penalised when they mess up.

    By punishment, I mean public humiliation, bankruptcy, even legal action. It is ridiculous that the persons who were partially responsible for this crisis walked away without any consequences. And this applies to institutions as well as individuals – the banks should have not been bailed out.
    A.

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  6. “By punishment, I mean public humiliation, bankruptcy, even legal action.”

    Well, do you think they really care about public humiliation? And how do you cause them to become bankrupt?

    As for legal action, that would require some new laws to regulate their behaviour first. Otherwise, there are no grounds on which to sue them. But think of all the libertarians and Republicans who’d be foaming in the mouth at such a totalitarian restriction on freedom!

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