Investment Markets » Banking and Finance
Why Are Bonuses Not Falling?
In light of the recent credit crunch, should bankers really be receiving record-breaking sums?
With City job losses reported on a daily basis, it was a surprise to discover that bankers and financial traders were awarded a record £12.6bn in the first three months of the year. This almost covers the £15bn write-offs suffered by British banks.
Paul Kenny, a GMB union official, was scathing: "There can no longer be any doubt that the multi-millionaire elite who run the City and the financial sector are out of control and divorced from economic realities facing their fellow citizens." He wants an urgent inquiry into whether the Bank of England's £50bn bailout, funded by the taxpayer, has found its way into these bumper payouts.
The prevailing view is that excessive bonuses encouraged excessive risk-taking. Thus, changing the bonus system should reduce the risk of a future major disruption in the world's financial markets. But bankers managed to lose huge sums before the arrival of bumper bonuses. The real problem is that bankers can take bonuses and run, before any gains on their deals actually crystallise.
The Institute of International Finance has a new suggestion: bonuses should be based not on absolute returns but on risk-adjusted returns. It sounds logical, but the credit crunch arose because banks couldn't price risk correctly. What hope for bonuses?
It would be better to bas bonuses on risk, cost of capital and a whole range of other factors. Furthermore, remuneration policies should be transparent, with guarantees (where bankers' packages are secure even if they don't perform or show up for work) authorised by the chief executive.
HSBC's top five directors are quite willing to align their remuneration packages to the bank's performance. If Europe's largest bank hits tough profit performance targets over the next three years, they will share £120m.
Chief executive Michael Geoghegan, who was recently publicly fretting about inflation and calling on central banks to do more to table the problem, is less vociferous when it comes to his own pay package. He is in line to earn a whopping £12m a year, which would make him the third highest paid FTSE chief executive.
The pay deal is designed to reflect HSBC's new standing as one of the world's top five banks. Apparently, HSBC's top five directors are paid well below the average of their peers at other global institutions. "The bank has never been known to overpay," said an HSBC spokesman. "And this will not change."
Expect a bumpy ride at the AGM from shareholders who beg to differ.
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