Time to pay the piper over bankers’ bonuses

I saw a postcard the other day that stated: “To make the rich work harder you pay them more, to make the poor work harder you pay them less.” It certainly struck a chord given the ongoing debacle over bankers’ bonuses, writes Liz Jones.

Banks defend their culture of enormous bonuses by saying they have to pay top dollar for the very best people. But don’t current circumstances show that this obviously doesn’t work? Banks having been paying ridiculous bonuses for aeons and yet it doesn’t seem to stop them getting into trouble does it?

They also argue that the people they are rewarding are not in the failing areas of said institutions. I question the ethical stance there. After all, if a business isn’t doing well, does anyone these days expect to get an automatic annual pay rise? I don’t think so.

Not giving big bonuses will also hinder their competitiveness, they say. Professor John Thanassoulis, from Warwick Business School, goes further: “Barclays’ and RBS’ desire to increase bonuses when bank profits have declined will lead to a weakening of the banks’ financial stability. The increased bonus pool at Barclays alone, most of which is earmarked for investment bankers, is equivalent to 1.7 per cent of the investment bank’s Risk-Weighted Assets. To put this into perspective the global response to the financial crisis has been to increase the proportion of Risk-Weighted Assets funded by safe equity capital by a similar proportion.

He says that Barclays felt it had no choice: “The chairman Sir David Walker noted at the AGM that Barclays’ business was targeted aggressively by competitors, keen to poach Barclays’ best staff. RBS also said they had to pay more if they were to remain competitive.”

Thanassoulis believes Barclays and RBS are both victims of a system of high pay levels which lead to financial instability as banks over-reach themselves to hire those they think can bring in extra business or generate higher returns.

Research published recently from Warwick Business School studies the aggressive poaching which is the key driver of high bankers’ pay and Thanassoulis proposes that a cap on total remuneration for investment bankers in proportion to Risk-Weighted Assets applied to all banks would contribute significantly to financial stability.

“Such a cap would damp down aggressive poaching and reduce bankers’ pay levels,” he maintains. “The banks would gain in value and in safety, so this is in shareholders’ interests.”

“The pay revolt at Barclays highlights that the unfettered system of pay competition is bad for shareholders and is bad for financial stability.”

Point to ponder: the same day the news broke that the UK government had capped bonuses at RBS, a press release promoting the move towards ‘the living wage’ crossed my desk which stated that almost one in five working people in the country are currently earning less than the Living Wage (which works out at around £7.65 an hour).