City Bonuses

A lot has been said recently about City bonuses, and I feel it may be time to put the thing into perspective. There are essentially three types of bonus. When I joined the City in the 1970s, I received just a monthly salary but my friends in what were then called stockbrokers earned a lot less as a basic salary but had a bonus. With an average bonus we all earned about the same, but when times were bad they scarcely earned enough to cover their rent or mortgage. This bonus didn’t apply to personal performance but to the company performance: dealers and secretaries were on the same deal. In the present unhappy times it seems obvious that these bonuses should be zero: the banks aren’t making any money.

In the post Big Bang City the bonus idea was applied to a lot more people, on more of a personal incentive basis. If salesmen sold a lot they earned a lot of money. I have no problems with that. Picture a vacuum cleaner salesman: he was told to sell vacuum cleaners and he sold shed loads of them. He should get his bonus because it is not his responsibility if the vacuum cleaners are no good. Several junior bankers earn a lot more than their senior counterparts: we learn that the highest paid employee in RBS earned four times what the Chairman earned. Good for him. But let’s not blame the sergeants; it’s the officers that make the decisions.

It is with the senior management that we (the people as shareholders) have to get tough. It is the managing directors and directors who have allowed a lot of this to happen. They it was who subcontracted out the credit analysis function to ratings agencies. They it was who got their banks into the stage where they didn’t know what they had invested in; couldn’t say how much was tied up in property or what the exposure to Icelandic shares was. They it was who told the traders to pile these assets on to the books.

The City – and this should come from the shareholders, not the government, needs a new form of remuneration. Bonus should mean bonus, and you get none when times are bad, even if it’s not your fault. For the senior men the shareholders should be able to claw the money back up to five years later. This would instil a sense of responsibility into investment and lending which will be sorely needed in this part of the cycle.

If a junior guy has got a huge bonus for selling something he wasn’t to know was toxic, let him keep it. He’ll need the money when he is laid off.