Wanted: someone to stick up for bonuses

22 September 2008

2 minute read

After the fury, the recriminations. Blaming bonuses for the trauma of the past 13 months is nothing new, but the finger pointing is reaching new levels of vigour.

Gordon Brown and Alistair Darling have let it be known that they will regale the Labour Party Conference with speeches calling for more regulation of the financial system and for "tighter control of irresponsible City bonuses".

Labour deputy leader Harriet Harman has set the pace. Last week she described bonuses as outrageous, blamed them for "mad house prices" in London (which may not be unreasonable given that Savills estimates that 5.5bn of last year's estimated 8.5bn bonus pot went into the capital's housing market) and said they were structured so as to encourage traders to take "unwarranted risks".

Not to be outdone, the FSA is apparently said to be planning spot checks on banks' risk systems. The penalty for non-conformity? Revision of the way rewards are calculated.

But before dumping bonuses into the dustbin of history, it's worth considering whether doing away with them would really make a difference. Most models of bonus reform look at deferring bonuses over time and aligning them with the risks inherent in their achievement.

Arguably, this is precisely what both Lehman and Bear Stearns were up to - both paid a high proportion of bonuses in deferred stock, meaning bonuses were aligned to the wellbeing of the firms as a whole. And employees at both saw the value of the last few years' bonuses wiped out as the stock plummeted.

Bonuses have also done some good. 8.5bn pumped into the Exchequer and the economy is no bad thing. Without it, charities are already said to be bracing themselves for a lack of cash.

Does someone need to stand up for bonuses? Or is Gordon Brown right to bash them into oblivion. We invite you to comment below.

AUTHOReFinancialCareers UK

Insider Comment

Fo
Foty
31 December 2008
Who is talking about Man, Arsenal or Chelsea star football players, they receive huge pay too including their bonuses as performance related pay. And everybody find that normal. We banking high performers deserve to receive decent packages too... Let the Government outcry about insanity of our bonuses.... If they try to charge more tax on football stars, the UK football will look like Zimbabwean football... if UK wanna keep a world first class financial industry, they should forget the bonus culture and focus on their real job.
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op
optimist
26 November 2008
What is gone is gone. Maybe we can move on to what the UK can concentrate on to build real value into the economy etc. or at least speculate on what the next bubble is so we can all jump on it.
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Ja
Jazmaz
2 October 2008
As for the banking industry contributing the most to the treasury- that's shameless rot considering many of these large institutions have international tax treaties, not to mention foreign registered addresses, so the UK doesn't receive the full whack, so to speak. Also, if you look at charts, much of tax money comes from indirect taxing, i.e. VAT, so Mr Mediocre on a salary below 40 or on benefits does contribute towards the GDP of this country.
Greed breeds destruction. Newton's third law of physics- for every action there is an equal and opposite reaction. The economy had this coming.
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Ja
Jazmaz
2 October 2008
When I was a trader at UBS I didn't make obscenely large bonses, i.e. I'm not a millionaire. Secondly it's many contributing factors that created the storm we find ourselves, including the federal reserve lowering interests rates, the demutualisation of building societies that used UK people's money to buy foreign debts, not regulating borrowing, which allowed any idiot the use of a credit card, and not regulating the privatised energy companies.
However, upon saying that it's true that some bankers are rewarded obscenely large bonuses. To begin with I never questioned it; however, a few years back I did consider it exploitation of a system that didn't produce anything.
What all these silly banks and banker need to understand, just as I did (before I switched to medicine) is that - when you work on long-term investments you ought to be paid for long-term gain, i.e. why pay a builder a huge amount of money when he's only built the walls and not the foundation of the house. Same way- the dude playing tricks with my pension money ought not to be
As for the banking industry contributing the most to the treasury- that's shameless cr*ap considering many of these large industry'
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Ja
Jazmaz
2 October 2008
what peopel are really p*ssed off about, id that its Mr Mediocre who suffers with the tax burden while these traders with their short term false profits muck up OUR long term pension schemes, savings and hard earned tax money and then run off.
And then they justify it by saying we borrowed too much in a market that they exploited with false profits. Bonuses are fine when your Bill gates, no one denies him his money. But they woudl if we picked up the tab for losses he caused. That's the difference.
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