Bankers deserve their bonuses

I know that this will cause an argument, as I was having this very argument myself, but I cannot let the opportunity pass to report a conversation I was having about City bonuses.

The media have a blast every time there’s a rumour of a bonus being paid in a bank, but here’s the rub: bankers deserve their bonuses.

Put it in context.

You go out for a meal and have great service - do you purposefully not tip the waiter or waitress, just because you happen to know that the restaurant is making losses?

You are a branch teller. You sit there every day smiling and chatting with customers, counting money, behaving honestly and doing a good job. Do you not deserve to be paid for meeting objectives, as per your job contract, even though the bank is losing money?

You’re working in a bank call centre. You work really hard every day, taking abuse over the phone. You are voted the best call centre worker of the year, and achieve all of your targets. Do you not deserve the holiday in the Canary Islands for the Best Call Centre Worker of the Year Award?

You see what gets me, taking the examples above, is that everyone in society from the highest to the lowest, from the meekest to the mildest, from the most arrogant to the most humble, would probably agree that - given the way you are employed and rewarded - you deserve your two-penneth worth.

If you agree that you would be a Scrooge if you go to a restaurant and hotel and don’t tip for good service, then surely you agree that if you employ a branch or call centre worker, and don’t pay them for achieving their annual objectives, you are behaving badly too.

If you were working in an I.T. firm, retail store or similar operation, would you not pay staff bonuses to call centre and store workers, even if the firm as a whole made a loss?

You probably would if you could.

So now we get on to the fact that we are talking about banks.

Just because the bank’s management and investment managers screwed up, does it really mean that every worker in a branch or call centre should be punished?

Shouldn't staff be rewarded if they achieved their targets and worked honestly and hard, with dedication and conscientiousness?

So now you may be getting a little convinced that yes, some of these folks deserve their £2,000 annual reward for good service or holiday in the Canary Islands … if you’re not convinced, then why not? Surely it is the bank’s management that should be punished, not the dedicated staff who worked hard for them and had no idea what a SIV, CDO, MBA, CDS and the rest was all about.

So now to the really contentious part.

If a waiter in a restaurant deserves their tip, even if the restaurant is losing money; if the housekeeper in the hotel deserves their few pounds that you left for them, even though the hotel is losing money; then the call centre worker and branch teller deserve theirs.

If you would reward the call centre worker in a retail business, even when the retailer is making losses, then you should reward the bank call centre worker.

So what’s the difference between that, and the investment banker who made the bank £10 billion profit last year?

Why should the investment banker lose their bonus of £20 million, when they achieved all of their objectives, worked hard and in a dedicated fashion?

Oh yes, because the bank is losing billions and is being bailed out by the government.

Oh yes, because the investment bankers are all greedy bastards, and should be flagellated in public.

Well, I’m sorry, none of that makes sense because didn’t you just agree that the call centre worker deserved their reward for achieving objectives?

What’s the difference between the call centre worker and the investment banker?

They both worked hard and in a dedicated fashion; they both achieved their objectives; they both had an expectation that was met and even exceeded; so why are you being so mean and saying they don’t deserve it?

Oh yes, because the investment banker is being paid £20 million whilst the call centre worker is being paid £2,000.

So it’s just a matter of scale is it?

That doesn't work then.

Do you think the £2 tip versus the £2,000 reward for meeting objectives versus the £20 million bonus for producing profits should really be changed, just because you don't like the size of the last figure?

Well the investment banker generated £10 billion in profitability for the bank, and is getting a £20 million bonus, so that’s 0.2% of profit.

0.2% of profit is the banker’s bonus on the profit he or she personally delivered.

The call centre worker?

£2,000 for achieving objectives in the call centre role that delivers … good service? Smiling customers? No profit or, at least, a profit you cannot measure?

So now you’ve been convinced to give someone a reward for delivering nothing but smiles, whilst arguing not to reward someone who delivered millions in profitability.

Just because the bank lost billions elsewhere wasn’t their fault.

Just because the bank’s management is incompetent isn’t their fault.

Just because the bank had to be bailed out by the government with taxpayer’s money isn’t their fault.

The fact is that they were employed to do a job and deliver specific result, which they delivered above and beyond expectations.

And, even in today’s current hostile climate, if you feel a waiter or housekeeper deserves their tip, that a call centre worker in a retail business deserves their annual bonus for achieving objectives, then you also agree that a branch teller deserves their reward, as does the investment banker.

Just because the scale of these things is massively different, is no argument to deny someone their due.

Just because the bank’s management is incompetent, is no excuse to break someone’s employment contract.

And just because the taxpayer is shelling out to pay for such incompetence is no reason to go on a witch hunt of those people who did their jobs with honesty, dedication and tenacity.

So stop whinging about bank bonuses and start focusing upon who should be made to pay.

Who’s that again?

Oh yes … the management.

Comments

[FredericBaud]

The argument turns around the distinction between "deserving" (which has a moral connotation) and "being contractually entitled to" (which is purely legal and economical). People feel comfortable when contracts seem sound and fair; unfortunately, while it is possible to assess soundness ex ante, fairness is always contingent to what actually happens. It seems that the current outcome was not anticipated by most and that there is a feeling of discrepancy between what some bankers are contractually entitled to and what they deserve.

[Andy Sanderson]

Chris, whilst I cannot fault your logic, as far as it goes, you have very much set out to prove your case along a single track... So, mimicking your style somewhat, here is a counterargument.

Is it fair that a call centre worker loses their job, when they have been doing that job honestly, throughly and diligently, simply because the company has lost a lot of money? No, of course not. But (sh)it happens.

Is it fair that a Back Office clerk, who has done their job just as well, gets laid off simply because the bank has lost a lot of money? Well, again, no. Tough. C'est la vie.

Is it fair that a £20m pound bonus, which could pay for quite a few of the above back office clerks, and hence save their jobs, goes to a single individual, who is probably not exactly on the breadline to start with? You decide...

While we're on the topic...

Is it fair that a trader who made £10bn profit last year, and received a £20m bonus for it, makes a loss of £10bn this year and therefore has to pay back, err, well, nothing really...

[Chris Dymond]

>Just because the bank’s management is incompetent isn’t their fault.

Isn't it the bank's management who are getting the bonuses?

Where *are* the bankers who made $10billion profit for the bank last year?

[Elaine]

The question is one of how the bonus was established in the objectives. I have worked for 4 blue chip FMCG organisations - manufacturers and retailers. In each of them the bonus payout is dependent on 2 factors - personal performance and company performance. Sometimes it is 3 factors, personal, team and company. In each of these there is a benchmark that must be met before payout can happen. It is usually set fairly low on the comapny side - say, 90% of the years target profit and revenue. So if the target is missed by 10%, which is quite a lot, none of the bonus pays out, even the personal aspect. If they get to 91% of target then you get relatively little fore the element that is company but good performance is still rewarded. This all makes sense to me and it is why I cannot comprehend a company paying out any bonus at all when they have fallen so wildly short of the targets as the banks have.

[Elaine]

Also - ok, let's take RBS (please, someone, take RBS) they apparently paid out £1.8 billion in bonus last year. Now based on your £20m for £10billion rationale that's 90 individuals earning a £20m bonus for having brought in a cumulative total of £900 billion. If these numbers were even remotely proportionate I cannot see how RBS are expecting to lose £28billion.

[Ron]

Most firms in the 'real' economy have to tie bonuses to company performance. If your company hasn’t made the money it can’t pay you and you haven't got tax payer cash to bail you out!.

I think there’s a few issues woven together here.

Firstly we shouldn't confuse a tip with a bonus. Tips for good service directly from a customer are fine and should be encouraged, but these aren't the same as a bonus. When was the last time you received such good service at a bank you felt compelled to praise, let alone reward the person who served you?

Secondly, bonus payments irrespective of overall company performance, is another example of management failure at the banks. I think that it encouraged an acute individualistic culture which contributed hugely to the current crisis. I’ve even sat in meetings and have been told by senior bankers; that even though the proposed project to cut transaction costs was great for the firm, that they wouldn’t do it because it didn’t hit any of their bonus objectives. So as long as the bank’s overall performance is irrelevant to the banker’s remuneration then we’ll always go through this cycle. I say pay large bonuses, but only pay them out of profits that are real and reported.

Thirdly, the issue is of bonus payments set against bailouts with Tax Payer’s cash. This is the issue for the man in the street. Since the government is now the majority shareholder, and subject to public opinion then quite rightly the people who have been bailed out shouldn’t expect the same level of reward. To those bankers; you’ve joined the public sector, your job is now safe, your pension is now safe, why on earth should you expect a bonus. If you want one, go join a private sector bank.

[Jeffry Pilcher]

Sorry Chris, but this is a fallacious argument. Tips and bonuses aren't anything close to the same thing.

Tips are a form of monetary gratitude extended by the customer to a worker in a service industry as recognition and appreciation for the service provided by the worker to the customer.

Bonuses are a form of compensation paid by an employer to an employee in exchange for the employee's performance and/or the performance of the company.

The only thing the two really have in common is that they are discretionary (or should be).

The fundamental difference is who pays the worker. A model where customers tip employees is radically different than employers giving bonuses to employees.

To make your analogy work, you have to limit the argument to how the restaurant owner compensates his/her employees. Now if Sally the Server worked her ass off all year giving great service, the owner may choose to bonus Sally regardless of how the restaurant performed. However, if the restaurant performed poorly, the owner should seriously reconsider if the manager or chef should get a bonus.

The mass media has oversimplified this issue. The choice is stark: Bonus or No Bonus. It totally ignores merit. All employees that did a good job -- from call center reps to waiters to bank CEOs should be rewarded when they do a good job.

But if I'm broke and I spend my last $5 on a meal at a restaurant, I might not be able to tip as much as I'd like (or nothing at all).

People working at companies should be mature enough to realize that when a company is broke, employees' expectations for bonuses need to fall in line. Randy the call center rep may have done an excellent job this year, and his boss knows it. But when there's no money, what can you do?

"Does someone deserve a little something extra" is a much different question than "Can the person paying the extra amount afford it?"

[Joey]

Interesting argument. I agree that the outrage seems a bit out of control. I really wonder why we haven't been so outraged over the way our governments spend our tax money and reward elected officials with our money? Our governments have been loosing money for years. If we scrutinized our government spending as closely as we scrutinized tax payer assisted bank spending, I think we would find equally, if not much more, egregious accounts of waste and rewarding of those who seem as though they should not be rewarded.

[Simon Deane-Johns]

As I said on my own blog recently, the scale of bonuses reflects the fact that regulation (ironically designed to protect us from what's just occurred) requires investment funds and opportunities to be matched by a relatively few licensed individuals. And bonuses will stay high while there is such intense competition for so few funds.

If we want to change that outcome, we could open up the process of matching investment funds and opportunities to be more directly accessible and transparent. This is not all that radical, as the "democratisation" of the financial markets would merely reflect the trend of the past whereby facilitators have opened up and allowed consumers greater control over markets for travel, retailing, auctions, betting, personal finance and even spreadbetting and contracts for differences.

[neil burton]

Chris, on one of the many recent TV programmes on this - not sure which - an ex-Wall St merchant banker was being interviewed. He said that he and his colleagues knew what they were doing was unsustainable, they knew it would end, just not when. He said their view was to keep taking the bonuses for as long as they could. The implication was that they knew the profits they were apparently making were built on sand and would evaporate. This is a long way from call centre or backoffice staff. Is it appropriate to expect the bonus to be paid from clean taxpayer funds? Seems more appropriate to pay it in toxic bonds (and also solves the problem of what to do with them.) And add in some share options, which might motivate those who have the skills and experience, to do something to re-establish some of the value that has been lost for the rest of us.

[Steve]

I disagree, Chris....

If one of the Wall Street firms who has lost billions of dollars was the major shareholder in a public non-Wall Street firm that lost as much as they have, with no end in sight, what would they do? They would freeze salaries, eliminate bonuses, cut staff, eliminate dividends and elect a new board. And they would consider this good business-sense.

When the taxpayers, now the major shareholders, insist on the same, Wall Street considers their requirements non-sense.

[RG]

The trouble with all justifications for bonuses is that they are asymmetrical. When the banker profits 1bn he gets 10mn, when he loses 1bn he loses none.
That's why it is like gambling...and that too with other people's money.
Any investment banker coming forward to tell me how much of their personal wealth they invested directly or indirectly in these CDOs, etc, at the time they were investing billions in these things for their bank?

[Roger Salty]

If anything the current crisis has reminded us how critical banks and bankers are to our lives. The question is: How do we re-establish a banking industry that sustainably serves the broader economic interests of all.

The revelation of how acutely self serving the culture of bankers and banking has become has come as a shock to many. However having worked my whole life in the city I know that the majority of those I have worked with understood they were there to extract as much money as they could for themselves as quickly as possible. We knew we offered less to society than a surgeon or an architect. We even new we offered pretty low value for money to shareholders and clients- but that was never the point- Even though we did work hard, loosely structured performance related remuneration allowed us to secure frankly ridiculous amounts of money to do pretty average work. I have always found it surprising that people ever lapped up the idea that we should receive extra money for just doing our job properly. Also, as we all knew, superior returns were more often than not based on a)good fortune, b)under pricing of risk and c)simply being around during one of the longest periods of economic growth in global history. Find me those superior returns now that risk is being repriced and we have global recession- perhaps revealingly we are now left solely reliant on our skill and good fortune, and its not a pretty picture.

What is perhaps more astounding is that it has only been since the government has arrived as a majority shareholder that anyone has thought to challenge the idea that we should keep getting healthy bonuses even if we are losing money on a grand scale. It very much illustrates how shareholders have totally lost control of the companies they own to their executives. As new governmental owners make moves to re-establish shareholder control the range of bizarre executives responses have only gone to reveal just how over-extended their collective sense of entitlement has become. Frighteningly -if anything- the media underplays the level of hubris amongst mid to upper management. It is not a secret that some very well remunerated managers in government bailed out banks have been threatening to walk while actively leaving chaos in their wake, unless they get a substantial bonus. The argument being that these remuneration levels are low relative to the sums at stake. I think in Chicago in the 20s they used to call this kind of racket a 'Shake-down'.

The sooner this disastrously damaging culture is broken, and errant managers and executives are brought to heal or shown the door, the sooner we might feel more optimistic about a achieving a banking industry that serves our broader economic interest. Tighter regulation will help restrain the worst excesses, however it will never establish a change of attitude. Besides the city is rightly confident it will always manage to be a couple of steps ahead of the regulators. Ironically Thatcher very clearly showed us what needs to be done when those working within a whole economic sector form a self interested cabal that threatens our wider economic interests.
- You make it very clear to them that if they do not quickly adjust to the new status quo they will not survive.
- Encourage the introduction of new entrants who offer better value for money, and a more sympathetic business culture.
- Help re-establish strong active shareholder control.

It will then just be up to individual bankers to decide whether they really do just want to walk away. I would suggest our banking industry would be well rid of those who do.