How should you control bonuses?

Mr Darling has now said in an interview that he will consider legislating to control excessive pay and bonuses for banks. He will find that is not easy when he turns to his advisers.

We first need to know what the problem is, then ask how do you fix it? There are three political problems that need examining to do with bankers pay:

1. Many of us find it unacceptable that senior executives working in loss making state controlled business are being paid mega bucks out of our money. Why is Stephen Hester being offered a £9 million package, when there would be someone good out there who would do it for one tenth of that sum and still be well paid?

2. I also agree with George Osborne that someone senior working for a bank not controlled by the government could be offered mega bucks for taking extreme risks, only for the bank to seek a government guarantee or other assistance if they get it wrong. That too must of us find unacceptable.

3. There is the fact that many people throughout the financial world do receive high basic pay and bonuses. If they get it right their firms earn mega bucks. If they get it wrong their shareholders, who have the power to hire and fire, have to pay up. I cannot see any problem with such generous remuneration if the shareholders think it makes sense for them and pay the bills if it goes wrong. Some in Labour love the politics of jealousy and want to stop all such high pay to the private sector, though they usually think footballers are an exception they do not wish to meddle with even where the footballers wages help drive the club into bankruptcy. They judge the public’s jealousy levels well, as the public is more jealous of bankers than of footballers who sometimes entertain and wow them. They probably think TV “stars” are also an exception, though it may have been taken too far in the case of Mr Ross.

The easiest way to tackle type One excessive pay is for the government as majority shareholder to refuse to sign contracts containing such payments. They should call in all the top executives of their heavy loss makers, and negotiate a new deal with them, deferring or cancelling bonuses until their banks are genuinely profit making and have provided for or sorted out all the loss making activities these executives have helped build up in recent years. These new contracts should be a condition of taxpayer support. They should be made to pay for what they have done wrong in the past by forgoing the bonuses they think they have earned. They should not be allowed to dump all the unprofitable business on the taxpayer and carry on as if nothing had happened.

Type two excessive bonuses are also best tackled in this way. There should be a general statement of government policy, that if any bank gets into trouble in future and needs taxpayer guarantees or cash, it will automatically trigger a retrospective revision of all senior executive contracts with a view to cost cutting as a contribution to sorting out the bank’s cash and profit problems. The Regulator can go further and say that in cases where they judge that large institutions that could cause damage to the system are offering excessive remuneration for excessive risk, they will require the institutions to carry more capital to undertake such business. Shareholders will then see that their generous remuneration policy imposes a further penalty on them in the form of lower returns on capital and the need to put up more money.

Those who think we need to tackle Type Three excessive remuneration by changing the law have to answer the following questions:

1. How do you define an excessive bonus?
2. How do you stop them simply increasing the basic pay so the total package remains the same, whilst the bonus element is reduced to the new legal ceiling?
3. How do you stop them employing their top people offshore, or switching the HQ to a jurisdiction where these new rules do not apply?
4. If your target is the guaranteed bonus ( a bizarre concept which has become necessary in some cases to hire good people who would otherwise lose out from moving), how again do you stop them calling it something else – like a “hiring premium” or “relocation package”
5. How can you judge in advance what is excessive risk? The law might prevent hiring deal makers , salesmen or dealers on low or no basic pay who make all their money out of activity. Yet this is a lower risk way of paying them, as it depends on them generating revenue to earn well.
6. How do you avoid other financial centres using this proposed new law as a good argument to financial institutions to leave London and go somewhere else altogether?
7. How can you exclude the footballers and media stars you like from the prohibition on high pay? If you don’t bankers could sign up to a well paid contract to appear occasionally on business TV, with a less well paid contract to do some banking as part of the mix!

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43 Comments

  1. Lola
    Posted August 17, 2009 at 7:00 am | Permalink

    ‘Excessive’ bonuses and pay are a function of the cartelisation of the banking sector and the hosing into it by the Government of vast quantities of easy money. Having banks ‘that are too big to fail’ also drives the moral hazard in these businesses that empower the employees – of all grades – to a feeling of invulnerability.

    If you want to curb ‘excessive’ pay and bonuses break up the banks into smaller operations and ensure that there is real comeptition. At the same tme, as long as the State retains the monopoly of money, run sound money policies and this will drive the banks to compete on security as well as rate.

    I do not agree that there is any such thing as excessive risk. Risk is personal and what one man thinks is excessive another thinks is entirley acceptable. Excessive risk only applies when someone else takes risks with your wealth. In other words banks, of all sizes, must be allowed to go bust. I remain firmly of the view that letting RBS and LloydsHBOS go down – in an orderly fashion – would have been the best course of action, and this would have been an absolutely stone bonkers certain way to control bonuses and pay. Of course it may have also done for one G Brown, which would have been A Good Thing and been just, as he is the architect of this financial crisis.

    • Waramess
      Posted August 17, 2009 at 7:57 am | Permalink

      Great post however politicians have no idea how to run a sound money policy, so we can forget that unless they suddenly relent and agree to operate the gold standard again

    • Robert K, Oxford
      Posted August 17, 2009 at 4:25 pm | Permalink

      The issue of sound money is a fascinating point that gets too little airtime.

      Think about a businessman running some vast conglomerate spanning numerous business segments. In the good times he spent heavily but badly to acquire businesses that are not performing . Not least of the problem is that he can’t find the right people to run the various subsidiaries to his satisfaction so is forced to micro manage matters that should properly be delegated. Strategic thinking goes out of the window. All of a sudden his business is hit by a downturn and instead of running at a small deficit, which he claims is justified because he is investing for the future, it suddenly starts to rack up huge losses. His relationships with his bankers and bondholders become frosty and there is a threat to his credit rating. His shareholders are becoming increasingly disastisfied and are concerned that if their original investment is to be protected they will be tapped by the businessman for a rights issue. The AGM is approaching and the businessman knows that he is about to be voted off the board. “Where, oh where,” the businesman would wail to to his stoney-faced co-directors, “can we find some more money?”. Then inspiration strikes. “I know,” he would cry, “let’s buy DeLaRue and they can PRINT us some money and all will be well.”

      Now, at that point in the real world he would be given a sedative and kicked off the board, not necessarily in that order (unless he worked for a government sponsored zombie bank, which is a separate story). But in the world of fiat money, which is the one lived in by today’s politicians, there is no such problem. When the cash runs out they can call up that friendly Mr King and get him to print some more. What would any company give for that little wheeze? Why would any government want to give up that handy little escape route?

      So I’m afraid that with the current political settlement there is little chance of any government agreeing to a sound base to the money supply, by which I mean one where money has an intrinsic value (for example, but not exclusively, gold or silver) and is priced by the market. The best we can hope for is an administration that recognises the importance of meticulous care in the handling of the money supply. Mr Brown has shown its utter contempt for prudence in this area and on this point alone his government should be chucked out on its ear.

  2. APL
    Posted August 17, 2009 at 7:08 am | Permalink

    JR: “How should you control bonuses?”

    MPs might start by setting an example, or rather, a good example. By for example; paying back all the outrageous but ‘within the rules’ payments that they have extorted from the tax payer over the last decade. We should have a lot more MPs complaining they are ‘ living on rations ‘ when we hear more of that sort of whinging from the generality of MPs, then we might have got it about right.

    In short, ” take the beam from your own eye before you try to take the mote from the eye of another”.

    • James
      Posted August 17, 2009 at 9:31 am | Permalink

      I agree with you entirely, APL!

      MPs must set a decent and honourable example before they whinge on about any criticism that may come their way.

      And what is wrong with a fair wage for a fair day’s work? That is what the rest of us have to live by and with, and it has never discouraged us from giving of our best in accordance with our contract of employment.

      Business risk? I took a risk when I accepted the contract of employment handed out to me – and that was my own personal gamble. Business leaders should take their own personal gamble too – and forget about their excessively greedy needs.

      • Nick
        Posted August 17, 2009 at 10:37 am | Permalink

        Spot on. MPs have presided over debts of 8 trillion. Who are they to critise.

        Get your own house in order first, and that includes the nationalised banks.

        That means stopping the increase in any liabilities and starting to pay them off.

        It also means being honest about the debts.

        ie. No more Enron accounting. If people give you money for their retirement, that is a liability and not an income. Unless that it you get up and tell people face to face, we aren’t going to pay you a penny in state pension, state second pension, state employee pension.

        However, if you do I suspect you will need more than the crap body armour the troups have in Afganistan.

        Nick

        • Stuart Fairney
          Posted August 18, 2009 at 3:17 am | Permalink

          They will pay the nominal cash sum because they own the printing press, so if your future liability is denominated on the national currency default is notionally at least impossible. I’ll bet Zimbabwe pensioners receive a few worthless Zim dollars each month. However the value of the pension in the biggest Ponzi scheme of all will be slight and certainly not what it is represented to be. So the taxing of private pensions (which unlike the various state pensions, you know, actually exist!) was the most vile act of future financial vandalism.

          Thus the difference between two leading politicians, Mrs Thatcher (as she then was) had the courage to say “Save for your own pensions” as she saw the demographic problems that lay ahead. This was politically difficult and very honourable. Mr Brown by contrast saw something to tax and spend the money on favoured groups for ultra-short term popularity by papuerisation of the future elderly. To put it mildly, this was not honourable.

        • Nick
          Posted August 18, 2009 at 10:54 am | Permalink

          That doesn’t work. It will work for Gilts. Most are fixed rate, and so inflation deals with part of the problem. You rip off savers who use gilts. However, when you want to borrow more, you get ripped off because those saves are wiser. They demand a higher interest rate.

          However, almost all the 8 trillion of liabilities are RPI linked. Inflation doesn’t work. The government has to default in some way to get out of the problem. Or it has to steal.

          It can cut the level of benefits. The partial default option. It can unlink the benefits from RPI. ie. Freeze the state pension. That’s the equivalent of making it fixed rate. Then inflation withers it away. That then means people end up on means tested benefits.

          Nick

  3. Posted August 17, 2009 at 7:42 am | Permalink

    One factor that seems to have been overlooked by a lot of commentators bemoaning the taxpayer money being used to support the banks, and that is that those self-same banks are themselves taxpayers.

    It could be argued, that the taxes the banks pay are in part a form of insurance policy so that should they fall over, the government will pay out to assist them.

    Part of the problem with the government finances right now is due to the collapse of taxes from those banks, who were lauded for supporting government spending in the good times.

    Taking the principle to its natural conclusion, why not simply permit banks to pay a percentage of their profits into an industry fund that can then step in to pick up the debris when a member fails.

    Any bank not part of the scheme is subject to tighter controls as its losses are implicitly state-backed.

    Any bank in the scheme can be as wild as they like, as the more money they make, the bigger the rescue pot becomes should they fail in the future.

    • Lola
      Posted August 17, 2009 at 12:30 pm | Permalink

      Or to look at it the other way round the corporate taxes paid by the nationalised banks are not taxes at all but merely a rebate to the rest of us in private business whose wealth has been used to bail them out.

      A better idea would be to use the tax collected to give us back our money by way of one off tax credits as the money is collected from the banks.

      The problem is that the banks balance sheets are being rebuilt at the expense of ours. This is entirely unacceptable.

      I do not agree with any sort of statutory fund. What is required is a wholesale reform of banking, that is the breaking up of the mega banks and the opening up of the retail banking market to new players (Virgin? Tesco? Me? You?) to re-introduce competition. Next the state has to run sound money policies (best made statutory to stop labour from cocking up yet again) or to return the freedom to banks to issue their own money. This will encourage competition on security rather than rate, and service prices would fall.

      Once individuals aka ‘The market’ knows that there is no consumer protection the moral hazard evaporates and ‘the market’ seeks out the most reliable banks. Responsibility is with the individual not with the State, which is by definition always irresponsible with other peoples money.

      If you really insist on consumer protection apply it as a specific levy or tax on depositors, that is lenders to banks, as it they who are at risk. This could be applied as a percentage of the average annual balance on the account. This would introduce the price signal into consumer protection and enable consumers to make a decision as to whether they were getting value for money. If this levy was privatised and collected by commercial insurers their would be price variations between banks. Yet another sound measure of bank security – and not a regulator in sight.

  4. Brian Tomkinson
    Posted August 17, 2009 at 7:45 am | Permalink

    Is there any evidence that shareholders exercise any restraint on remuneration policies? Aren’t most shares held by large institutions which have shown that they are locked into and participating in this bonus culture? They want their own bonuses and aren’t likely to rock the boat. The money which is used to buy these shares is often from millions of individuals in pension schemes, insurance and investment funds. They potentially lose out but how often do those in the cosy club that controls their investments lose?

    reply: The shareholder discipline works better in private equity, family and tightly held companies, and companies bought by larger companies who police their investment. I was covering those cases more. The companies where shareholder discipline is weakest are the very large companies that may threaten the system, to whom I apply the other sancitons I have set out.

    • Lola
      Posted August 17, 2009 at 12:35 pm | Permalink

      In re JR’s comment. And/Or at the same time you break up the mega banks and seek to open up the retail banking market to new players. This is not difficult or expensive (relatively) in this age of powerful IT. It is the existing cartel that prevents it. Trusted brands would have a field day. What about a ‘Which?’ Bank. (That must be one of my best sentences ever!).

      • Posted August 18, 2009 at 6:14 am | Permalink

        One of the most exciting of these is a return to the very roots of banking; a Christian Bank. I heard about one such at the gym this morning. It actually seeks out people who are in debt and sorts them out as far as possible. I am currently investigating this.

        • Lola
          Posted August 18, 2009 at 9:25 am | Permalink

          A ‘Christian Bank’ sounds like an oxymoron to me.

    • Michael Lewis
      Posted August 17, 2009 at 5:37 pm | Permalink

      “Is there any evidence that shareholders exercise any restraint on remuneration policies? ”

      Yes, Shell shareholders recently handed out a beating to management. At last!

      • Brian Tomkinson
        Posted August 18, 2009 at 8:33 am | Permalink

        Michael,
        Thanks for your reply. An encouraging sign but the problem is that voting against the remuneration report is only advisory and directors do not need to repay bonuses. I agree that it is at least better than voting to accept the report. Perhaps this is an area which needs looking into to give shareholders greater influence over the management of the companies that they own.

  5. Ed
    Posted August 17, 2009 at 7:53 am | Permalink

    Mr Redwood,

    Type three is naturally the most controversial one. In my view the key is to ensure that grotesquely bad management (as we have seen in the UK banking sector) is punished. This means not just forfeiting some or all gains accrued from the risks they took for which rewards preceded bitter fruits, but also jail terms for the systemic risk which, regardless of the profit and loss of their institution, they have incurred for all shareholders everywhere and the nation whose financial system they have abused. It is time for a return to the concept of fiduciary duty.

    The answer to excessive bonuses and remuneration is to instill some fear. This in turn would lead to a more conservative, collegiate approach, where bonuses and remuneration would be shared more widely (as would risk).

    If fear is to come from legal sources, we face the question of what is illegitimate risk taking? There I think is where regulatory metrics can provide an arbitrary but satisfactory basis for judgement. Ratios of assets to liabilities must be kept within check, and no liabilities hidden from that equation. There exist responsible institutions here and abroad and study of these must provide the foundation for the metrics that would measure the failure and be used to trigger punishment.

    The analogy of car driving seems to work. We have offences that relate purely to speed- which would equate to the metrics about assets to liabilities. We also have offences relating to car crashes, which may have resulted from little more than speed in difficult conditions. Is it so difficult for polticians to see that such a distinction needs to be applied rigorously to our financial system? Wouldn’t financial “drivers”, seeing disciplined free moving financial traffic in the UK, see the UK as a prime market and work there rather than racing dangerously in racetrack juristictions?

    Your argument that shareholders have to take responsiblity is widely used, but weak. Many shareholders are themselves institutional, and may be seeking bonuses in the short-term for high returns. Furthermore, most people hold shares in many companies as a portfolio; they will scarcely pay attention to one eccentric company.

    The answer seems to be as I have outlined above. However, there is no reason to wait to enforce the rules; the concept of fiduciary duty is an ancient one. Given the reckless abandonment of it by some of our financial aristocracy, a commonsense argument is watertight that they abused their fiduciary duties. There are time-honoured punishments for this. I have little faith, but I hope that some within the Conservative movement can see that these are richly merited by some. The Conservatives have an ideal opportunity because they do not, like Gordon Brown, have old loyalities and skeletons of irresponsiblity in their cupboards (nb. Maybe Ken Clarke has one or two). Can they see the chance there? One would like to think Osborne does. Certainly he has at times impressed with his grasp of finance. Mr Redwood, you too can play a vital role.

  6. alan jutson
    Posted August 17, 2009 at 7:57 am | Permalink

    I do not have a problem with people earning big bonuses IF they earn the Company large sums of money, but if you are going to incentivise success, I have found in the past that a reasonable salary only is then paid, not an excessive one. This has the effect of self limitation on earnings if you fail to be successful.

    I take your point about what is big, and what is excessive.

    Clearly any Bank should set its own staff trading limits, until a proven track record is known, to try and avaoid high risk taking losses, which I am sure happens to a degree ?

    Bonuses should not be paid to anyone until the Banks profit is crystalised.

    No Bank should be large enough to not be able to fail without taxpayer funding.

    Clearly State owned Banks should be controlled in a sensible manner, but beware of over regulation, trading control, otherwise the Bank will simply drift into failure, as it will be non competitive in the Market and then fail more slowly.

    I agree that the Banks have become a sort of unofficial cartel on wages/bonuses, all paying huge sums to staff, this unofficial cartel has to be broken down, and the only people really who can do that is the Banks themselves, if they have the will.

    I do not think more and more regulation is the way forward.

  7. Colin D.
    Posted August 17, 2009 at 8:12 am | Permalink

    The banks are saying they must pay bonuses or they will lose good people. I don’t believe it! These people are paid handsomely on the assumption they can do an excellent job. Why do they then need a bonus to do that same excellent job? Anyway, don’t let them fool us that there aren’t good people out there to replace them if they leave.
    Call their bluff. Ban the bonuses and just see if they leave. I bet most of them will stay because there are not so many opportunities out there as they claim and they will be scared to be shown up as easily replaceable. If nothing else, the financial crisis has shown these people have fouled up big time so what makes them so ‘special’?
    Just remember Reagan. The flight control people claimed they were irreplaceable. Reagan called their bluff, sacked the lot and – hey presto! – lots more competent people appeared to do the job. The same will apply to greedy bankers.

  8. Stewart Knight
    Posted August 17, 2009 at 8:32 am | Permalink

    You can’t control bonuses, and you shouldn’t. These are private companies who will up sticks and leave, and rightly so: I would.

    Let’s talk more about the multi-millions in bonuses for the likes of HMRC who lost billions too, and get well paid as it is. That’s where you should concentrate your fire-power instead of on this red herring invented by Labour.

  9. Acorn
    Posted August 17, 2009 at 9:41 am | Permalink

    And now for something completely different. “Economics” is a false construct. Central Banks with their fiat currency; fractional reserve ponzi banking scams, these are all the fabrication of Middle Ages’ kings, barons and mercantile monopolists. Bazman will like this one 🙂

    http://edge.org/3rd_culture/rushkoff09/rushkoff09_index.html

    • StevenL
      Posted August 17, 2009 at 2:28 pm | Permalink

      Sounds more like one for Adrian Peirson than Bazman.

  10. Posted August 17, 2009 at 10:28 am | Permalink

    It is no longer that they “earn” them, or that they are a carefully assessed rate for the job in relation to the overall balance of society. It is simply that once at the top these days, some people not only have the keys to the safe, and the keys to the office, but in effect they assume ownership of all the assets. Moreover, they expect to extract in one year what might have taken forty or more in the past. If you give the servants unlimited access to the keys of the wine cellar, then they are all too likely to drink all the wine.

  11. gordon-bennett
    Posted August 17, 2009 at 11:04 am | Permalink

    Why not insist that all bonuses are paid as share options (perhaps exercisable over a number of years) and thus close the feedback loop.

    Bonuses awarded for schemes that later backfire and hit the share price will be automatically reduced by that fall in the share price.

  12. Martin
    Posted August 17, 2009 at 11:40 am | Permalink

    The culture of bonuses is an odd one. In most jobs you get a wage or salary hopefully based on your market value. A bonus is a sort of spike payment to say you have been worth a lot more than normal for a short time.

    However a lot of bonuses in finance companies are for “free” e.g. the market in general rises 20%, the fund’s asset value also rises at the same rate – big bonus, These bonuses are I suggest a form of wage inflation. (Lack of supply of financiers).

    The problem we need to solve is to increase the supply of financial folk to ease the wage inflation in that industry.

    Passing laws is a waste of time and just panders to the “something must be done” brigade. Doubtless if a law is passed then there will be horrible unintended consequences – e.g. the small businessman won’t be able to give his staff a bonus if the firm has a good year.

  13. Posted August 17, 2009 at 12:48 pm | Permalink

    How?

    Methinks you are looking at the wrong end of the equation. It’s the taxpayer-funded bail out that’s the problem. If you take that away then the bonuses are no longer the taxpayers’ problem.

    • Lola
      Posted August 18, 2009 at 9:27 am | Permalink

      Eggsaktlee. Moral hazard breeds excess.

  14. Jim
    Posted August 17, 2009 at 12:52 pm | Permalink

    I would let the market do it. If you separate investment banking from retail banking, the bankers have less money to gamble with, so bonuses would naturally shrink.
    Break up banks which are too big to fail, because they are actually too big to save. Smaller banks would serve local communities better, pay lower salaries and cause less damage to the financial architecture when they go bust.
    The problem is that the government is in the pockets of the bankers, there can be no improvement until we stop rewarding failure. fred Goodwin is a case in point, if RBS had been bankrupted we wouldn’t be paying his pension.

  15. no one
    Posted August 17, 2009 at 2:10 pm | Permalink

    Difficult one this

    I don’t think it’s just the banks

    Much of the psuedo public sector (the private sector which is 100% dependant on work from the state) pays bonuses in a crazy way too

    Problems with bonuses
    · They encourage short termism
    · They payout on financial throughput regardless of the levels of risk
    · Very imprecise matching of merit to payout

    Most companies should be split into sales and delivery functions, all the way to the top. The delivery director or his assignees should set the cost/allowing for risk, and the sales director and his assignees get bonussed on margin above cost they obtain from the customers. Natural tension exists between sales and delivery. This model works a lot for banks too. Problems always arise when the sales people are determining not only the margin they will sell for but also the estimate of costs.

    One of the biggest problems with the organisations causing problems is their senior folk are dominated by people who are little more than over promoted sales people who excel at politics, or accountants, there are far too many companies with little representation at the top by people with substance in the areas the companies work in, or experience of real leaderships of complex teams of folk with hard nosed substance.

    So rather than artificially restricting bonuses with legislative means, it would make more sense to address some of these problems?

    I am also tired of folk who have built a career doing nothing other than cost stripping, its not really innovative to take a thousand jobs and import folk from India to do the same work at less than a 5th of the wages a European would demand. This is not entrepreneurial endeavour and it should not be getting rewarded, in fact it should not be legal!

  16. Anonymous
    Posted August 17, 2009 at 2:47 pm | Permalink

    Ensure as an essential condition of the bail out involves complete firing of management and complete write off shareholder fund.

    Alternatives, include no bail out, that is let the bank collapse and job of the government is to force strong ant-monopoly law.

  17. Posted August 17, 2009 at 3:19 pm | Permalink

    What worries me here is motivation.
    Why do people do things for money?
    Well, of course, to survive, pay the mortgage, raise a family etc etc.
    But why do some people need to have so much money?
    I suggest that it is because they are in some sort of competition with other people. Often, I have noticed, it is insecurity too. Often, too, it comes at tremendous personal cost. Very, very often it results in family breakdown. Children of very very rich children quite often fall by the wayside.
    Most of us know all this. The papers are full of it. Amy Winehouse? George Best?
    In banking, though, apparently, there are hoards and hoards of people who do not know it. They, apparently, are working simply to get more and more money for number one.
    When I look back at my own life, I honestly do not think that I did anything just for a lot of extra money. Ask yourself honestly, did you?

  18. no one
    Posted August 17, 2009 at 4:01 pm | Permalink

    Why don’t you do a piece on how many jobs in British banks, especially the state owned ones, are outsourced to (companies like- named companies given -ed) using staff in the (developing-ed) world. And how many jobs have been “near shored” with developing world staff from these companies in the UK on inter company transfer visas working for the banks?

    Highly relevant as the financial mess in (at least oen of these companeis) is public knowledge, as is the (lower standard -ed) employment practises in place in (some-ed) of these organisations.

    Do you think sensible bonus levels are easier or harder to maintain when so many of the staff doing the work are in indentured service, and are unable to speak out without loosing their positions/visas etc only to return to the (poorer conditions-ed) of their homeland? And mostly working in a bullying environment etc.

    Do we think its right that the UK public sector is employing thousands… in this way? Is it really cheaper to have thousands of folk on the dole queue replaced by folk from these organisations when you look at the bigger picture from the states point of view?

    Just wondered

  19. Posted August 17, 2009 at 4:28 pm | Permalink

    Excellent.

    Contrast this with the Guardian letter on the same subject.

    Looks like Optimism/Growth v Pessimism/Shrivelling:

    http://charlescrawford.biz/blog/NSBRRO736411

  20. Michael Lewis
    Posted August 17, 2009 at 5:20 pm | Permalink

    The lack of forced separation between wholesale and investment banking didn’t cause this crisis. Look at HBOS. A mess of its own making. RBS was always a ‘pretend’ investment bank. So the whole issue of bonuses is a bit of distraction imvho.

    Bonuses, perhaps could be controlled if there is a state guarantee. i.e. For so-called “universal” banks.

    This would lead to the creation of “stand alone” investment banks.

    In theory you should allow such banks to fail. As happened to Barings. No bailout to stock or bondholders.

    However, look at the “home of capitalism”, AIG was bailed out to save (other institutions ed): that’s not how it should work.

    Incompetent businesses (no matter how old or well connected) should fail and their assets recycled. I’d even believe in the ‘recovery’ if this had happened. Instead we’ve got ‘cash for clunkers’ and our own variant: bringing forward purchases and maintaining overcapicity at the cost of increasing debt.

    I wouldn’t call that a recovery. Bonuses – closing the stable door, the horse has bolted and is running over the horizon…

  21. Brian E.
    Posted August 17, 2009 at 6:12 pm | Permalink

    I have no problem with large bonuses in principle, but there is a major problem in the banking industry in that they are making these as a result of, in effect, gambling with someone else’s money. Often the bonuses are based on short term performance and give no consideration for the longer term.
    I remember once being told by a departmental manager in a fairly large organisation that the company had recently employed consultants whose main advice was to improve staff training to ensure the longer term viability of the company. This manager said to me that he would be doing nothing of the sort, any “unnecessary” spending would reduce the department’s profit, and hence his bonus. Asked about the longer term, the reply was simply, “I’ll be moving on in two or three years with a good record of success, so who cares?”
    To me, bonuses based on longer term performance are acceptable, but not when they are simply based on one year’s results.
    Oh, and to me the suggestion that if bonuses are not paid the people who don’t get them will all move on, simply doesn’t wash. One or two, maybe, but there can’t be all that many jobs out there just waiting for them!

  22. D McGregor
    Posted August 17, 2009 at 6:13 pm | Permalink

    Here’s a splendid idea . why don’t we nationalise the banks and then we only have to pay the staff Civil Service rates of pay. The whole thing could be run on a not for profit basis and there would be scones for tea!

  23. Matthew Reynolds
    Posted August 17, 2009 at 6:53 pm | Permalink

    There is a simple way to wipe out excess bonuses & pay in state funded institutions – tax them at 90% ! In state run bodies that have big salaries we should just dock 60% tax on public sector pay that exceeds say £200,000 p/a with a 50% levy on those between £100,000 & £200,000. That would deter public servants from having excess pay at the taxpayers expense.

    Also I would let MP’s carry on claiming expenses under the old system – only at the end of each financial year they would have to write a cheque to the Inland Revenue worth 50% of all their expense claims in that period. That would stop MP’s milking expenses too.

    So excess public sector pay & MP’s profiteering from expenses could be stopped by targeted high top rates of income tax. For private sector workers the top rate could be 35% and would only kick in when incomes exceed £200,000 p/a. The basic personal tax allowance could be £12,000 p/a for all taxpayers regardless of income and a 20% basic rate of tax apply to incomes of between £12,000 p/a and £200,000 for all taxpayers.

    We need a tax system that rewards useful private sector employment and that stops public servants getting paid too much at the taxpayers expense. That will help shrink the excess public sector by limiting the pay-bill and expand the private sector by making work pay for people in that sector pay. Most normal public sector workers would not suffer and all the low paid would gain.

    How is that for an idea John ?

  24. Posted August 17, 2009 at 10:24 pm | Permalink

    Well, shareholders are the only people who can have a say on remuneration, so if we’re to put the brakes on “excessive” pay, we need more private shareholders with the ability to exercise their rights as owners. There are two easy changes to government policy which will push in that direction. (I’m not saying that they’re a cure-all, but they will do a small amount of good!)

    The first is to require all brokers to allow the owners of shares to exercise their voting (etc.) rights. Currently, many brokers will hide behind nominee walls, and as a consequence shareholders with those brokers cannot exercise their rights. The simplest way to change this would be expensive, but I should expect that there are cheaper ways of arranging for this to happen, too.

    The second is to break up the pension fund racket. As long as the majority of shares are held by City boys in investment and pension funds, companies will always be paying over the odds for their staff, because the pensions fund boys are a part of the same network. We need people to own shares directly, and they are more likely to do that in an Isa. So abandon personal pensions—they’re only really useful for the rich anyway—and increase the Isa allowance significantly in compensation.

    There are probably other ways of encouraging much greater direct share ownership, but there’s two to be getting on with.

  25. sm
    Posted August 17, 2009 at 11:22 pm | Permalink

    Limit bonuses to a maximum multiple of the median salaries paid in the bank on which Schedule E taxes have been paid.

    More competiton. Fewer barriers to entry for smaller operators.

    All bonuses to have clawback clauses which taper away into the future.

    Limits on gearing and or tax relief to reduce the attractiveness of ‘debt capital’ over risk equity.

  26. bill
    Posted August 18, 2009 at 8:00 am | Permalink

    John

    I think you “retrospective” mechanism is too complicated and would not work.

    I feel a major problem with quoted companies is that institutional investors holding shares on our behalf have not exercised enough influence over quoted companies. And whilst I am not suggesting such a structure in all cases, I do feel bankers cosseted by shareholders (and the government) could learn a lot from the restraining effect working a partnership can have what with potential for unlimited liability on a joint and several basis for partners.

  27. Nick
    Posted August 18, 2009 at 10:56 am | Permalink

    What percentage of profits should someone be paid?

    Marxists say the workers should get most, and the capital owners the least.

    With a banking bonus being 10% of profits, its not very socialist is it?

    Nick

  28. Bazman
    Posted August 18, 2009 at 4:38 pm | Permalink

    Break the entire system up into smaller banks with limits on size. The fees for banking and share dealing are ludicrous the money does not come out of thin air. The bankers could then be paid the ‘market rate’ that we all so love on this site. Which would probably be the same as an architect or engineer being paid for the bridge not falling down with the resultant medical bills, rebuilding the bridge, compensation and so on. The main problem with this idea is political. How would the elite of this country enrich themselves so easily and so maintain the status quo? There is no way any of this will be fixed without a serious overhaul of the financial system. With legislation to boot. The political will is not there though as most of the government and establishment are in the pockets of the bankers. Johns problem blob and these splendidly civil replies to this post are the reason we are in this mess in the first place.
    Where are your teeth middle England? That footballer or TV star will not put me out of a job and I am not forced to listen or watch him. You defend these bankers on principles.
    Born yesterday.

  29. TrickyD
    Posted August 19, 2009 at 4:08 pm | Permalink

    High bonuses and high salaries are a sure sign of the lack of a free market, and high barriers to entry from competitors. Where are the new banks? New entrants should have an open goal to enter the market, pick up huge numbers of disgruntled customers and offer reasonable rates of return.
    But the government has created exactly the opposite conditions in the banking industry now. It is almost impossible for new start-up banks to set up for lending and taking savings, because the industry is now dominated by a few huge companies with the full backing of the state behind them.
    Not only that, but it is now not in the government’s interest for new banks to enter the market. Given the huge stake we now have in the mega-banks we need to stop people moving to newer banks if we are ever to get our money back. So we are hoist by our own petard.

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  1. […] George Osborne has rightly criticised excessive bonuses for bankers in state-bailed-out banks and John Redwood has highlighted some excellent solutions to dealing with these: 1. Many of us find it unacceptable that senior executives working in loss […]

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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