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Stunted By Reality Just another know-it-all talking about life, business, technology, sports and music.

16Aug/09Off

let the bankers get their money

Cut the bankers some slack. Greed is good.

Cut the bankers some slack. Greed is good.

I’ve just been reading about George Osborne (the opposition Conservative's Shadow Chancellor) statements about how bankers' large pay awards were "unacceptable" for any bank backed by state guarantees. I was stumped once again because I’ve heard this before from him, the press and the Man On The Street.

The Conservatives are making some mistakes on their journey to government. They'll get there despite themselves and because of Labour's ineptitude. However, this banker's pay issue is not going to be responsible for the Conservatives attracting voters and as such they should just stop taking vote-buying stances like these. The public is disillusioned by the banking sector, amongst other things, but thems the times we live in. All of a sudden the Man On The Street is not talking about Osama Bin-Laden, Kandahar and the Tora-Bora mountains, but about quantitative easing and the stimulus package. This doesn’t mean the Man On The Street is adequately informed as I’m about to point out.

For me to believe that the self-appointed party of business is sincere in not wanting the banks to issue big bonuses is quite hard. Why? Because we have to look at what a bonus is in the first instance for us to think about whether or not the practise is a good idea.  By definition a bonus is a reward for greater than expected performance. Success, in other words. Anyone who owns a business should be glad if they have to pay out a bonus. Simply put it means that things are going well and that the people responsible are being rewarded for helping to bring about that success. By extension large bonuses are probably a result of big success. I hear that HSBC delivered almost £200,000 in net earnings per head in their investment banking arm the other week. That was just for one quarter by the way. Stunning.

The only issue we should be arguing about is how bonuses are structured. Fred Wilson on AVC.com touched on it some time ago, though I didn't agree with all his points. Among the contentious issues I'm against that he pointed out are;

  • Guaranteed bonuses - This, I believe, was a big part of banking remuneration practise prior to the crisis. Guaranteed bonuses are not in anyone's interest other than the person receiving them. No company has any business guaranteeing a bonus, though I understand the thinking behind it.
  • Contractual obligations - "all bonuses should, at the end of the day, be subject to board and compensation committee approval (even if the goals that trigger the bonuses have been met). The board has a fiduciary responsibility to look after the stockholders first and foremost. If paying the bonuses (even if they have been earned) puts the company in trouble, then there needs to be a mechanism for the board to avoid paying them. Compensation committee and board approval does that." Where the compensation committee has approved remuneration they should not however, backtrack as happened with RBS and their former CEO.

Having taken into account the above two scenarios I believe bankers (and any other worker) must be given whatever bonuses their success dictates. If that bonus is large and based on a percentage of the business they've brought in, so be it. The bonus just has to be measurable and the business they've bought in, traceable.

Mr Osborne thinking that large bonuses are a bad thing is just something I can’t buy into. Maybe his, the Man On The Street and the press’ sentiments are driven by the prevailing economic crisis, but I think that it’s misguided and an over-reaction. On the contrary, some of these troubled banks like Northern Rock and Lloyds could do with attracting as much top talent as they can to get them out of the messes they’re in. How do you think they can do that?

Of course the Man On The Street is also a voter (probably a former Labour one at that) and thus Mr Osborne wants to be on his side. But hey, I believe voters are a stupid bunch anyway. Mr Osborne doesn’t need to placate them by giving them the bankers’ heads when he may just need those same bankers if he gets to government.