Of UK banks and bonuses…

Posted on 3 Dec 2009 by The Manufacturer

Howard Wheeldon says we'll allow the bankers their bonuses if we know what's good for us!

Since the financial crisis began in 2008 I have generally avoided comment on the emotive and often vexing issue of UK bank bonuses. However, whilst I have certain reservations in broaching the subject, given the intenseness of the current media debate on the remuneration and bonus issue, plus the obviously-genuine if sometimes misguided public concern, it is become obvious to me that the issue of bank bonuses cannot be easily ignored.

Collectively we must somehow bring ourselves to recognise that it is right that the bonus issue should have been formally acknowledged by the elected government of the day – as it also has by both HM Opposition and the Lib-Dems. Suffice to say that the issue of bonuses has at a national level been properly addressed by all the various parties concerned – not least by the banks themselves, this being their fiduciary duty and responsibility to shareholders. Not that any of this matters to government of course if there is the remotest chance that by further playing the bonus hand in the eyes of the public there may be votes to be won. Thus the issue rumbles on seemingly like a battle between two great enemies despite there being some kind of formal acceptance and agreement with regard to how future bonuses (from 2010) may be paid: how they may be paid in relation to specific risk; when they are to be paid; and in what particular form they may be paid (ie. cash or shares).

Today the matter in hand is apparently how bankers – particularly those employed by RBS in which the government owns 70% of the equity – might receive their 2008 bonus entitlement, how it should be paid and, importantly, whether bonuses should be paid at all, given it’s an entity in which the State holds such a significant stake. Well, Chancellor Darling, let me say loud and clear that in my view they certainly should!

There is little doubt that the profile of bonus payments has also been fuelled following the decision to appoint a Frenchman, Michel Barnier, as EU Internal Market Commissioner. Nevertheless, none of this has been helped by the rather-too-public statements of intent by the government suggesting that the Treasury will veto the specific RBS bonus pool that is apparently put at £1.5bn. Now, as my colleague David Buik rightly said in a written piece earlier today, [for RBS] not to pay would surely mean the board would be in breach [of its fiduciary responsibility]. What’s certain is that despite the events of today and the strong hints of what Chancellor Darling might or might not do with regard to the RBS bonus pool the issue is not about to go away any time soon. Worse perhaps is that the bottom line of all this is that in some way or another we shall probably all be losers whatever action is taken. Meanwhile we must at least question and attempt to ensure that whatever the eventual outcome of future bonus payments the issue should be addressed in a fair, sensible and equitable manner – one that puts the UK national interest first alongside those within banking and financial markets and others that produce such considerable wealth for the nation. Sadly, I doubt that what emerges will have been based on really sound judgement and that whatever the future decision on this is, be it a national one or one that best suits the interests of the wider EU, what emerges will be unworkable leading to a gradual winding down of London’s great strength in the global market place. I will now make two main observations:

We are, I believe, all very mindful that a handful of British banks have needed to be held up at the behest of taxpayer money to the tune of £75bn. Ignoring Northern Rock in this particular instance, much of the taxpayer investment involved here is now held in the form of equity in just two banks – the Royal Bank of Scotland and Lloyds Banking Group. Thus it may well be a fair enough question to ask is whether it is right that these banks pay large cash bonuses to staff ahead of paying the taxpayer back? My answer to this is that they certainly should and I justify this on the simplest of observation, saying that unless banks [state controlled or quoted concerns) are always freely able to conduct day to day business on competitive international market affairs with staff that are fully motivated to win, those same banks will have little chance of paying the full levels of ‘debt’ back to the Exchequer. So why would I even question the ability of banks to freely operate in international markets? Simply because to achieve this requires those same banks to compete for the experienced senior staff and traders necessary and, just as importantly, to hold them in place. Such skills certainly do not come cheap and make no mistake, in a business that is as frenetic as this and that contains far less loyalty than it once did, human nature will always dictate that if there is a better deal around the corner then that is the one that will win the hand of a trader.

So completing the first observation Lesson One is for the bonus sceptics – don’t underestimate just how competitive international banking markets are both in business terms and that of requirement to employ highly skilled staff. Lesson Two – don’t lose sight of how necessary it is for banks to make enormous amounts of money over the next few years if government debt is to be paid back and that they need to retain key staff to enable them to do just that. Lesson Three is to not forget that banks are most often contractually obliged to make the proposed bonus payments, assuming that the staff concerned have achieved their part of the bargain. Lesson Four is to remember not only that the UK has carved out for itself a massive global market share of the international banking and financial market but also just how valuable this is to the UK exchequer, both in the form of taxation and to the balance of payments. Indeed, banking and financial markets are responsible for the employment of hundreds of thousands of jobs spread right across the UK and may in UK industry terms be considered the last bastion of great success that we cling on too.

My second observation concerns the wider issue of government interference in management and particularly of how banks or any other employer for that matter actually reward staff. Yesterday Lord Myners told us that between them senior bankers and traders would earn in salary and bonuses a total £5bn this year. I am told that he also said something about 5,000 bankers earning £1m this year and yet, only last week, Sir David Walker had said that only 1,000 workers would receive £1m. Do I see another coat of red on Lord Myners I wonder? No matter, I actually have no idea which figure is right and quite frankly, I care even less. We all accept that it is necessary during tough economic times particularly when inflation is rife that government should have an automatic right to impose some kind a pay freeze. History tells us that because of the friction that so often creates between employers and trade unions that few pay freezes last for that long. We accept then that the government does have that right but more than twenty years since the last attempt at a pay freeze we must also recognise that things have moved on. But even if I can accept that right in a democratically elected society such as ours what I cannot accept is that the government has an automatic right to interfere in day to day management of any company unless of course it happens to own that company outright. It does not own either Lloyds or RBS outright and therefore other shareholders are entitled to a say. Even when it has owned an entity outright it hasn’t often set a very good example on pay. Take Royal Mail for instance as an example of a wholly state owned entity and one that could hardly be described as making that much money over the years. Yet look at the vast amounts of money paid to the senior executives in bonuses – a point that almost beggars belief as the government attempts to pay more than just lip service to how bank staff are rewarded. Moreover this questions whether the government has the right to force arrangements on banks that have not required to be bailed out even if they have availed themselves of benefit of quantitative easing. Well the answer to that is that whilst it is in my view wrong they are the elected government of the day and thus, assuming they can get any move through the parliamentary process, it seems that we had better get used to the fact that they have.

No comment on bonuses is complete without realising the potential damage of Britain in future losing out in the international banking and financial market arena. On this issue I am quite clear in my mind that neither Gordon Brown nor Alistair Darling care a damn about the future place of Britain in the international market place. Yesterday they confirmed that they were happy to throw away the keys to Britain’s very success in this hugely important market allowing all and sundry from Europe to push us around and steal away our very hard earned lead. Call it pure defeatism if you like but nonetheless it is pretty vile. The inevitable result of all this interference is that successful bankers may well fly away from British shores and that while few will totally abort the UK, many banks will wind down some operations here. What’s certain in a capitalist society is that once levels of government interference are deemed unacceptable here we will begin to see slow erosion of what has, since our days as the world’s leading manufacturer ended, the most successful industry we have had. And once that path is opened it will not be long before Britain is no longer regarded alongside New York as the centre of international banking excellence.

Howard Wheeldon is the Senior Strategist at BGC Partners.

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