Oh the happiness: the banker who rejected his bonus

If you have not picked up the sarcasm in the title then you may want to look away…

As BBC reported Royal Bank of Scotland (RBS) boss Stephen Hester rejected his £1m bonus in restricted stock, following very strong political pressure. This sent shivers down the spines of the public, mostly those that are a bit out-of-touch-with-reality and have very superficial understanding of how these things (should) work. Let me use this example to talk generally about the situation with high pay and bonuses in the banking sector.

Earlier, Labour said it would force a vote on the issue after Prime Minister David Cameron refused to block the bonus from the mostly publicly-owned bank.

What on earth were they thinking?? This serves no other purpose than attract voters in a subject that, as always, few understand, but many are willing to exploit for political reasons. This shameless populism I find extremely annoying. Vote-hunting from Labour MPs, that creates a very bad situation indeed, as a financial analyst notes:

[…] William Wright, investment bank analyst for Financial News told the BBC: “It sets a very dangerous precedent for RBS.

“It raises the level of political risk and political interference in the day-to-day running of RBS to what some people many consider to be intolerable levels.

“It raises very serious questions about who actually is running RBS day to day.

“Shareholders, in this case the UK government, appoint a board, which in turn appoints an executive team to run the bank, and here we have a situation where the board agrees something, which has been signed off by shareholders and then they have been forced into a U-turn by political opinion.”

I think people conflate shareholding with management. It’s one thing shareholders having a say in some important decisions, but they have neither the skills nor the experience to get involved in the day to day operations of the company and decisions that otherwise need a good understanding of the market. Up to a degree, it’s acceptable in taxpayer-owned companies to have a higher level of scrutiny, but this doesn’t justify reversing previous decisions, or acting hastily in the light of “public opinion” or “public pressure”.

If the CEO of a big bank manages to increase the value of the company by, say, £200m in a year, then getting him at £1m per year is a bargain! And of course the board knows this, as well as the fact that to attract top talent you need to pay top money as well. Private companies know this all too well: they typically pay higher salaries and bonuses than public ones (and certainly than mostly government-owned RBS). If they did not think they were getting better value for their money, why would they do this? Supply and demand: to attract and keep good performers you need to splash out good money and link the bonuses to performances as much as possible.

Shadow business secretary Chuka Umunna said Mr Hester was already being adequately rewarded for his performance.

“He received £1.2m a year – that’s 46 times the average salary of an average employee in this country – to do that job,” he said.

That is one of the most meaningless comparisons I have seen: this guy is NOT doing an average guy’s job. He does not have the average guy’s stress or responsibilities. People always focuses on inequalities, but this is the wrong attitude. Inequalities in salaries reflect inequalities in the amount of training, experience, skills, and opportunities and (yes) luck each one had in reaching the level of productivity they have. The market will generally “decide” correctly how much this is worth, and companies wanting to attract the top will, naturally, pay top money. Why is inequality an issue? It should be the general level of poverty and the standard of living that should be in people’s minds, not salary inequalities, because these are only natural. From the perspective of the government, they should ensure that people get equal opportunities, not equal rewards!

And of course this is not a zero-sum game: a CEO getting a high bonus does not mean that my salary will be smaller! Not to mention that a CEO has the ability to contribute (directly or indirectly) a lot of value for the economy in general that may benefit others as well.

“Usually you receive a bonus when you’ve done something above and beyond – exceptional, extraordinary.”

“But many of the things that have been cited in terms of things that he’s done for the bank are things that you would expect him to do.”

I disagree with this. Bonuses are there to reward strong performers, not necessarily extraordinary performers. And I think Shadow secretary here confuses descriptive with prescriptive: what is someone expected to do, does not mean one will achieve them with efficiency or even at all. A strong performer may reach targets earlier or more efficiently saving more in the process. And besides, this is a competitive jungle out there: many CEOs will not indeed achieve the things they were “expected” to achieve.

Former Liberal Democrat Treasury spokesman Lord Oakeshott said Mr Hester’s decision was “better late than never”.

“I’m glad that eventually Stephen Hester has seen sense and seen the outrage of most people in this country, and Lib Dems who have been complaining bitterly about this for weeks,” he said.

“I’m very sorry that David Cameron and George Osborne didn’t see that, and have been defending the indefensible right up to today.”

More bullshit here. How on earth do “most people in this country” know how to run or what is best for RBS? Why should they have a say in matters of compensation or other operations of the bank when they do not understand how the market works? The only thing they seem to understand is “bankers make much more than me, therefore we should tax them more” logic…

And why is it that people always care about bankers’ bonuses, but not salaries of, say, professional athletes, celebrities, movie stars, etc? Many of those get a lot more than, e.g. an RBS boss would take, and yet all the rage is on the bankers. And let’s not even go into the level of responsibilities. David Beckham losing a penalty will result in a couple of lost points and a couple of boots flying around. A big bank’s CEO’s mistake could cost the viability of the bank, and the jobs of thousands of people -evidently.

The only grey area in my mind has to do with golden parachutes, potentially large amounts of money given to executives that failed to do their job properly and were fired. However, even in this case, it may make sense for a company to try to get rid of a failed executive quickly so as not to increase of another potentially disastrous decision or a lengthy court battle which could cost much more than the severance package would.

I think bonuses need to be more tightly connected to performance -even after an executive has retired or moved on, so that accountability does not finish when one leaves a company, and executives do not suffer from short-sightedness, disregarding longer term consequences of their actions, in the name of near-term profits.

Other than that, this was full of the usual: populism, ignorance, and bad reasoning…