Investment Markets » Banking and Finance
How Should Bankers Be Paid?
The City's bonus culture is claimed to lie at the heart of the current crisis. Is reform possible?
When Mervyn King unveiled his £50bn initiative to unblock the money markets, he was at pains to stress that the measure was not intended to protect the banks, but to protect the public from the banks. He has since warmed to his theme by launching an unprecedented attack on the bonus culture in the City, which he claimed was partly responsible for the current crisis because it encourages excessive risk-taking.
The Bank of England's governor is in good company: the director-general of the CBI, Richard Lambert, US economist Joseph Stiglitz and the Archbishop of Canterbury, Rowan Williams, have all made similar points, though the latter wisely declined to be drawn on the details of how the regulation of high salaries might be achieved.
Their remarks reflect a growing clamour that something must be done. The question is: what?
The answer is to find a way of making City high-fliers more accountable for their actions. How many of these bankers would have been quite so keen to punt on financial products they clearly did not understand if they had been forced to play with their own chips?
King believes the focus should be on eliminating short-termism – exactly the point made by UBS in a damning report into its own $38bn write-offs. The bank said it had been paying some staff for the gross revenue they generated, rather than the actual profit – with the upshot that they received big immediate bonuses and not enough longer-term incentives, such as deferred shares.
No other bank has made such a public mea culpa, but it is plain they're all reviewing their rewards policies. Even so, we're unlikely to see much of a change. The old argument in defence of colossal payouts always wins out: "If we don't pay big bonuses, our good people are going to walk."
In an ideal world, it would be a matter for the market. Investors should sell shares in banks that have a policy of paying jumbo bonuses to reckless traders; those paying on long-term performance would then automatically be rewarded with a higher stock market rating.
Nice idea, but unfortunately shareholders haven't been doing their bit: pressure for radical reform to align rewards with long-term returns has been muted. It has been left to the Bank and the CBI to push for change.
If it is not forthcoming, we will have learnt nothing – and can expect another banking boom and bust, another round of rights issues and another round of dividend cuts, probably in around 2020.
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