Guest Blog: Bank Bonuses Amended

Guest Post By: Luke Springthorpe

They’ve been branded “offensive” by Vince Cable, “out of control” by the Prime Minister, and “corrosive” by Ed Miliband. When it comes to bonuses paid out by banks, there’s only one message that is politically acceptable to espouse: they’re too high, undeserved and at odds with the principles of social justice that seem to be enshrined in the UK.

The response from the banks is a well-rehearsed line by now: “you need good, commercial people motivated to do a good job”, so says Stephen Hester of RBS. Without attractive bonuses, they’ll either work elsewhere- be it in a different sector, or in a different geographical location.

Ascertaining who’s right and who’s wrong is as open ended as political issues come, however, and is essentially a question of justice. Few, if any outside a hard-left element, disagree with the bonuses on distributive grounds. Not many are prepared to argue against it in the context of equal distribution of resources- which leaves us with two of the most common objections.

The first is a question of whether they deserve their bonuses. It is often the case that those who receive the highest bonuses work longer hours than the average person. The effort and time expended in their work often has the potential to lead to an unhealthy life balance for which, it could be argued, they deserve to be compensated.

What’s more, the divisions they work in are often highly lucrative and international in their scope. To oppose high levels of remuneration on these grounds is to ignore the fact that the “boom” in bonuses coincided with record profits at banks. The recent decline in the fortune of banks has been matched by a £7 billion decline in the total bonus pool- returning it to the overall level that it was around 15 years ago.

The second is a more ‘utilitarian’ issue. To put it simply, the question posed here is do high levels of remuneration benefit society as a whole and increase ‘happiness’?

During the ‘good years’, the utility provided by banks seemed to be apparent. They appeared to have found a way via securitisation that allowed risk secured against mortgages to be minimised, and home ownership rates increased. This went alongside a period of increased financial flows requiring a range of financial products and a high volume of mergers & acquisitions. Investment banks were booming and their staff were remunerated accordingly. The tax returns funded growing public spending in the UK, which arguably led to an increase in utility justifying their bonuses.

But does a downturn induced by stagnant real wages mean that banks have ceased to benefit the rest of society? For the most part, they continue to perform the same function as they did before the credit crunch of 2008. That there has been a decline in lending is both down to more stringent bank regulation, as well as asset prices that continue to fall. Put simply, why would a bank lend against an asset (ie real estate or commercial property) where the price is forecast to fall?
The critics choose to counter this on the grounds that the “socially productive” element of this apparent increase in utility is open to doubt at best and illusory at worst. We then have the “productivity” argument that suggests, as I have already alluded to, that an upswing in profits is dependent on overall economic activity, which an individual ultimately can claim little or no credit for. This begs the question of why exactly they should be rewarded for it?.

The problem is that these arguments are used in isolation to single out banks, when the reality is that the arguments employed would be applicable for every pay grade in existence- not just directorships.

The kaleidoscope of justifications or criticisms you can produce on either of the above grounds are the reason the issue continues to be debated time and time again. They are highly subjective measures of whether bonuses are just or not.

It is the subjectivity of the issue that has the potential to cause problems for the banking sector moving forward. For so long as the wider economy continues to falter, so will their fortunes. Investment banking activity is dependent on mergers and acquisitions, securitisation of often non-liquid assets and offering a range of derivatives to allow firms to insure against all manner of risks. Clearly, this is all reliant on the underlying health of the economy.

What’s more, the problem for banks is that they are caught in a precarious position. All are still (to differing degrees) answerable to shareholders, and all are judged (even those where the government holds a stake) by their profitability.
This is an inevitable result of the “lender of last resort” support that was offered to them by the Government. This has led to an argument that banks- and, in turn, their best remunerated employees- are quasi-public utilities that benefit from an implicit subsidy by way of a state guarantee that they cannot fail.

The problem with conducting a debate where banks have to repeatedly justify every round of bonuses as being one which benefits society as a whole is that the contours between a privately run company and a social utility become blurred.

It’s this implicit subsidy that causes the problem for banks- even if we ignore the fact that billions were sunk into banks through the ‘private sector’ (be it individual investors or other institutions) via rights issues to shore up their balance sheets.

Whilst it is far from clear that there is a coherent moral case to actively intervene on the issue of bonuses, it is obvious that this will continue to be an issue for as long as the economy flat lines. The sense of injustice felt at high remuneration packages is undoubtedly amplified when those in the middle feel squeezed.

From a recruitment perspective, hedge funds will provide an attractive exit route for many ‘quants’ from investment banks who feel their skill set and efforts deserve a better bonus- and less questioning over whether they’re worth it. The non-bank financial sector is significant, and it may well be that employees- present and future- begin to examine these in a bit more detail.

	Luke Springthorpe works for Charles Stanley PLC, one of the UK’s largest independent stockbrokers. A graduate from the University of Manchester, he is also Deputy Editor for the Bow Group think tanks magazine, ‘Crossbow’. He also has an active interest in politics.

Tags: Banking, Luke Springthorpe, recruitment